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SEC needs more funds to hike HFT rules

Friday 4 February 2011 - by Andrew Hickley

The US Securities and Exchange Commission is looking to add to its regulatory responses to the 'Flash Crash' though the organisation requires higher funding in order to do so, according to its chair Mary Schapiro.

In a speech given on Friday to a legal seminar at the Ronald Reagan International Trade Centre in Washington, Schapiro stated that with high-frequency traders accounting for over half of the daily trading in the US, further rules must be added to protect markets from the dangers entailed by algorithmic trading.

These include what she describes as a 'limit-up/limit-down' system which would ensure that trades must be tied to recent prices of a security, with the market pausing if no trades occur within set price limits of an asset for a specific period of time.

Rules are being examined which would enhance transparency of trading venue practices, adding that regulating the practices of broker-dealers acting as agents for investors is another area where rules could be needed.

"All of these issues are complex and interrelated," Schapiro said.


"But the equity markets are too important to the economic success of our nation to shy away from doing what is needed to ensure that they operate as efficiently and fairly as possible."

After the Flash Crash, which involved the biggest ever market fluctuations on the Dow Jones index after an unusually large trade caused automatic algorithmic trades to spiral, the SEC brought in a number of regulations to try and prevent a repeat of this event.

These included 'circuit breakers' to temporarily restrict trading when prices fall at a breakneck speed and prohibitions of 'stub quotes', where firms will offer quotes on stocks at dramatic trading prices to ensure that these types of trades are generally not executed.

However, Schapiro reiterated concerns that the new regulation will be meaningless if the budget of the SEC isn't increased.

Last year the SEC compensated "harmed investors" double the amount of funding it receives in fining firms.


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