For all the controversy over the problems associated with high frequency trading, regulators don’t seem like they’re in much of a rush to fix things.
The FOX Business Network learned the Securities and Exchange Commission has all but ruled out enacting a separate set of laws to combat improprieties involving high-frequency trading. Instead, Wall Street's top cop will likely enact a broader set of market reforms to deal with a myriad market-structure issues, including the high-speed trading, sometime next year.
Continue Reading Below
One person with direct knowledge of the SEC’s thinking says the regulator is conducting a “holistic review” of problems in the securities market, including the increasing use of private trading platforms known as dark pools, which have come under fire for failing to protect investors from predatory traders. The set of rules the SEC envisions also includes focusing on the major stock exchanges like the New York Exchange to ensure they have the tools necessary to deal with illegal high-frequency trading practices, according to people with direct knowledge of the SEC’s thinking.
An SEC spokesman declined to comment.
SEC officials are said to have determined high-frequency trading itself is not illegal, despite the controversy surrounding the practice that followed the publication earlier in the year of the book 'Flash Boys' by Michael Lewis. The book alleged the equity markets were “rigged” because such high-speed trading allows certain market participants to gain an unfair competitive advantage over investors.
Some of the advantages outlined included the ability to place orders in a fraction of a second, which allowed high frequency traders to front run, or trade ahead of other investors, thus driving up costs. While the commission might bring enforcement action against individual high-frequency traders, the main thrust of its new rulemaking will be to make sure the stock markets treat all market participants fairly, these sources say.
But the commission’s rule-making on dark pools could result in several shutting down, according to people with knowledge of the SEC’s thinking. Dark pools are private stock exchanges used by large investors who don’t like the transparency of the public markets operated by the Nasdaq and the New York Stock Exchange. Already, the New York Attorney General’s office has filed a civil complaint against Barclays PLC for failing to provide investors trading through its dark pools accurate information about high-frequency traders that also used the platform. Barclays denied the charges and is vowing to fight the matter.
Still major dark pool operators are weighing whether they will remain in the business. The FOX Business Network has learned Goldman Sachs (NYSE:GS), which operates one of the market’s largest dark pools, is weighing a move that wouldn’t allow those platforms to be used by outside investors, including high-frequency traders, people close to the firm say. Goldman wouldn’t completely shutter its dark pool, but it would “re-purpose it” for internal trades exclusively, these people say.
A Goldman spokesman had no immediate comment.
The New York Attorney General’s office is also probing Goldman's dark pool, and those of other firms as well.
“I think that the big banks are going to wake up and now in the era of billion dollar fines they’re going to find that the money they make from their dark pools is so small and the regulatory risk is so large, I think a lot of people are going to say it’s not worth it,” Seth Merrin, the chief executive of Liquidnet, a global institutional trading network said.