Proprietary high-speed trading firms that execute trades on dark pools and other electronic platforms would be subject to greater regulatory oversight under a proposal unveiled on Wednesday by the U.S. Securities and Exchange Commission.
The plan, which is expected to be issued for public comment by the SEC, would require high-speed firms to register and become members of the Financial Industry Regulatory Authority (FINRA), Wall Street's self-funded regulator.
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As FINRA members, the firms would be required to open up their books and records for routine compliance examinations.
Wednesday will mark the first time the SEC has officially moved toward more directly overseeing proprietary high-speed trading firms.
The plan was first previewed by SEC Chair Mary Jo White last summer, and is one of a series of measures she is proposing to modernize and improve equity-market structure rules.
The SEC has been exploring equity-market structure reforms since early 2010. The agency's review intensified later that year after the May 2010 "flash crash" incident in which the Dow Jones Industrial Average plunged 700 points before it rebounded sharply.
Although no high-speed trading tactics were to blame for the incident, it sparked a worldwide debate about the role they play in the marketplace.
SEC Commissioner Luis Aguilar, a Democrat, said in prepared remarks Wednesday that the plan is important because it will help improve FINRA's surveillance efforts.
That's because today when proprietary trading shops execute trades off the lit exchanges, the firms' identities are not reported back to FINRA, he said.
"This will ensure that these (high frequency traders) can be held responsible for any potential misconduct," he said.
Most trading firms are highly automated and use pre-programmed instructions, known as algorithmic trading strategies, to make lightning-fast decisions on which securities to buy and sell, with little human intervention.
Regulators have concerns, however, that poorly designed algorithms could cause turmoil that hurts investors, or worse, be designed to intentionally manipulate the market.
Separately last week, FINRA also proposed a rule that would require those who design, develop or significantly modify trading algorithms to register as equity traders.
(Reporting by Sarah N. Lynch; additional reporting by John McCrank in New York; Editing by Peter Galloway)
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