Yesterday, Securities and Exchange Commission Chairman Mary Jo White announced a broad set of initiatives to tackle the growing concerns about the influence of computer-driven trading on the stock market. Included in these initiatives is the proposed increase in regulation of high-frequency traders and dark pools, in order to boost market stability, improve markets for smaller companies, and enhance transparency.
In her speech, Chairman White explained that “addressing the issues of our current market structure demands a continuous and comprehensive review that integrates targeted enhancements with an expansive consideration of broader changes. But we must not ignore the largely positive evidence of market quality. That reality demands careful study and deliberate action when considering fundamental changes. As we evaluate the merits of broader changes, we will also continue to assess and address specific elements of today’s market structure that work against the interests of investors and public companies.”
Among the proposals outlined by Chairman White is the regulation of aggressive short-term tactics when the market is particularly volatile. Additionally, she is proposing to require high-frequency traders to register with the SEC and acquire membership in FINRA, which would bring the traders under more strict oversight. However, many high-frequency trading firms have complained about being forced to join FINRA because of the fairly high cost.
According to White, “Transparency has long been a hallmark of the U.S. securities markets, and I am concerned by the lack of it in these dark venues. Transparency is one of the primary tools used by investors to protect their own interests, yet investors know very little about many trading venues that handle their orders.”
White’s proposals are in response to the mounting debate about the influence of superfast computers, which have come to account for more than half of all stock-market volume. This movement of trading away from public exchanges has significantly changed how the market functions, with critics citing that oftentimes these rapid-fire trading firms have advantages over other investors.
In order to maintain fairness, the SEC will examine market data feeds and work with stock exchanges to minimize the speed differences between their public feeds and high-speed direct data feeds used by high-frequency firms.
In her closing remarks, White stated, “I expect that the specific measures I have identified today to be considered by the Commission in the coming months. While our review has already resulted in discrete actions targeting specific issues, the more fundamental policy questions demand — and are receiving — close attention at the SEC… Continued engagement by all market participants on these issues is critical.”
The Chairman also recommends that the SEC establish a new Market Structure Advisory Committee, which would comprise of experts who will review new initiatives and rule proposals.
“We will continue the disciplined, data-driven approach to market structure that has marked the last year. Our comprehensive review and follow-up actions will ensure that our equity markets continue to operate fairly and efficiently, and in a manner that both optimally protects investors and promotes capital formation,” White said.