The Securities and Exchange Commission (SEC) in the US has begun a widespread effort to crack down on stock trading techniques that regulators worry are giving sophisticated financiers, armed with lightning-fast computers, an edge that everyday investors cannot match.
The SEC chairperson, Mary L. Schapiro, said on Tuesday that she would push to eliminate a controversial high-frequency trading technique known as “flash orders”, which allowed traders to peek at other investors’ orders before they were sent to the wider marketplace.
“We want to know if people are utilizing technology for illicit purposes such as gaming the markets and getting advance knowledge of trades,” said senator Charles E. Schumer, who had threatened to introduce legislation banning flash orders. “Chairman Schapiro is going to attempt to separate innovations, which are good, from taking advantage of people, which must be prohibited.”
Seeking action: SEC chairperson Mary Schapiro. SEC is also expected to propose new rules for semi-private marketplaces. Joshua Roberts / Bloomberg
An explosion of computerized trading has helped drive volume on the New York Stock Exchange alone up by 164% since 2005. Stock exchanges say that more than half of all trades are now executed by just a handful of high-frequency traders, who use rapid-fire computers to essentially force slower investors to give up profits, then disappear before anyone knows what happened.
The SEC is also expected to propose new rules for semi-private marketplaces known as “dark pools”, which are available only to select investors, as well as other trading techniques, according to people familiar with the agency’s thinking. In a flash order transaction, buy or sell orders are shown to a collection of high-frequency traders for just 30 milliseconds before they are routed to everyone else. They are widely considered to give the few investors with access to the technology an unfair advantage, even by some of the marketplaces that offer the flash orders for a fee.
But sentiment on other trading innovations is mixed. Dark pools, for instance, are useful to institutional investors like mutual funds because they offer the ability to anonymously buy or sell shares in private marketplaces without revealing the price until all trades are completed. Large investors often prefer such transactions when they wish to trade big blocks of shares, out of fear that announcing their intentions will set off a run in prices.
But some dark pools are open only to select investors.
“There is the danger that significant private markets may develop that exclude public investors,” Schapiro said in a speech in June. Such marketplaces could offer select participants valuable information “to which the public does not have fair access” and potentially make it difficult for the public to get accurate prices, she continued.
On Tuesday, Schapiro said she had asked the agency to devise “an approach that can be quickly implemented to eliminate the inequity that results from flash orders”.
Any proposed rule changes would require approval from the SEC’s commissioners after a review of public comment. Several investors who frequently engaged in high-frequency trading said they did not expect the SEC’s rules to greatly affect their profit. All of the traders spoke on the condition of anonymity, because they did not see any personal gain in speaking publicly.
“We move faster, smarter and understand risks better than other investors,” said one. “As long as everyone is subject to the same rules, I’m not concerned. Profits have always flowed to whoever dominates the marketplace, and we have a technological advantage that it costs millions to match.”
©2009/THE NEW YORK TIMES