"HFT: finally some worthy steps..."

David Fuller's view Hooray! President Obama may not be flavour of the month but at least his administration appointed a veteran regulator in Mary Schapiro to head the SEC. Today's announcement, reported by The Wall Street Journal, shows that for the first time in a long while the USA has a SEC which is not Wall Street's poodle but actually has a responsible approach regarding the markets, and therefore all investors who believe in a level playing field.


Since the link to the WSJ's report may require registration, I have reproduced the story here:

By JESSICA HOLZER
WASHINGTON-The U.S. Securities and Exchange Commission voted Wednesday to bar broker-dealers from granting traders unfiltered access to an exchange or trading venue, a move aimed at preventing a trading error from causing a severe market disruption.

"Naked access" lets traders buy and sell stocks on exchanges using a broker's computer code without requiring them to filter through the broker's systems or undergo any pre-trade checks.

Such trading arrangements have exploded with the growth of high-frequency trading firms, which often don't want to be bogged down by a broker's controls. In some cases, brokers rely on assurances from traders that they have their own controls in place.

The SEC voted unanimously Wednesday to adopt a proposal it made in January requiring brokers to put in place risk controls and supervisory procedures relating to how they gain access to the market.

The requirements apply to all brokers, regardless of whether they sponsor customers seeking to access the market via the broker's systems. The rules effectively ban naked access because they require traders to funnel their orders through the brokers risk controls.

The rules aim to reduce brokers' financial exposure, since brokers are legally responsible for all trading activity that occurs under their codes.

Aiming to fill a potential loophole in the original proposal, the new rule also applies to alternative trading systems that offer market access to entities that aren't brokers.

The SEC, in a fact sheet describing the rule, said the procedures will help to prevent erroneous trades and shields against breeches of credit limits by traders, as well as failures to comply with regulations.

"The potential impact of a trading error or a rapid series of errors, caused by a computer or human error, or a malicious act, has become more severe," the SEC said.

Write to Jessica Holzer at [email protected]

I have called for effective regulation of high-frequency algorithmic trading since I first heard about it - here are previous items - and I described it as a WMD in my presentation: Two Different Worlds, which you can also find on this site.


I never believed that baloney about high-frequency trading being benign and increasing liquidity. The reality was that HFT players increasingly controlled liquidity while crowding other investors out of the market. Left unchecked, HFT would have caused plenty more May 6th 2010-style market meltdowns, undermining the US stock market's effectiveness in capital formation and frightening away many other investors.

I do not expect HFT to go away - it was too lucrative for that, but its speed of access has been checked so it may have to reinvent itself.