SEC Chairman Targets Dark Pools, High-Speed Trading

The Wall Street Journal

The top U.S. stock-market regulator vowed to ratchet up oversight of computer-driven trading Thursday, setting a more aggressive tone for market regulation amid concerns that lightning-fast trading poses risks that could undermine market integrity and harm investors.

Securities and Exchange Commission Chairman Mary Jo White, in a wide-ranging speech before exchange executives, bank officials and high-speed traders, called for stricter scrutiny of high-frequency traders and private trading venues and suggested the agency could soon limit some of the advantages they now enjoy.

Among the most significant proposals: Ms. White said high-frequency traders should register with regulators as broker dealers, which would pull them further under government scrutiny. Such traders largely have avoided direct oversight since they are typically private outfits trading on behalf of their owners.

Ms. White also directed SEC staff to try and develop a rule that would prevent rapid-fire traders from engaging in short-term strategies that can disrupt markets and increase volatility. In addition, the agency will review practices such as the use of complex order types that critics say can give certain investors an advantage.

"Technology can and has greatly increased the efficiency of our markets, but it can also allow severe problems to develop very quickly—just consider some of the systems events of the last few years at exchanges and brokers," Ms. White said, referring to glitches such as the May 6, 2010 "flash crash," a failure in the Nasdaq Stock Market's data feed last year and a 2012 trading debacle by Knight Capital Group that cost the firm $461 billion.

The new rules, if approved and implemented by the SEC, could force significant changes upon high-frequency traders, who now account for more than half of all stock-market volume, according to market watchers.

"It was clearly not a classic lunchtime speech," said Nasdaq OMX Group Inc. Chief Executive Robert Greifeld, who attended. Ms. White's comments set "a clear policy direction for the commission for the next three to five years," he said. Mr. Greifeld's exchange would be subject to new requirements proposed by Ms. White, such as more disclosures about how stock-exchange market-data feeds operate.

Regulators have been widely criticized for failing to keep up with advances in market technology and for allowing high-speed firms to operate with little direct oversight. The flash crash, when markets swung wildly amid a flurry of technology glitches and heavy selling by computer-driven firms, put added pressure on the SEC to rein in high-speed traders.

Ms. White's speech was her most direct response to heightened concern that the growth of high-speed trading and expansion of trading away from public exchanges has substantially changed how the market functions. Critics say the firms at times have access to advantages that give them a leg up on other investors.

Ms. White said the agency would launch a committee to weigh proposed SEC initiatives and rule changes about how the stock market functions.

Many proposals are likely to trigger pushback from some high-speed firms and other market participants. Defenders of high-speed trading say the firms help regular investors because the traders stand ready to buy and sell under most market conditions.

Some of Ms. White's harshest words were for "dark pools"—off-exchange trading venues that don't post investors' buy-and-sell orders, and only publicly report trades after they take place.

"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," she said.

The SEC will work with Wall Street's self-regulator, the Financial Industry Regulatory Authority, to expand trading disclosures by dark pools and other venues where traders swap stocks away from public exchanges, Ms. White said. The agency also will consider requiring that brokers disclose routing decisions for large, institutional orders. Nearly 40% of all trading takes place away from exchanges, according to Tabb Group. The new measures "would further promote market stability and fairness," a Finra representative said.

For their part, dark-pool operators say the off-exchange venues help big investors trade because they can make large orders without alerting the rest of the market to their intentions.

Getty Images Mary Jo White set a more aggressive tone for market regulation.

The agency also will look into concerns about the resiliency and fairness of market data feeds, Ms. White said. A public data feed for the Nasdaq Stock Market failed last August, causing the exchange to shut down trading in Nasdaq stocks for hours and raising questions about the vulnerability of computer systems handling huge amounts of trading data at lightning speeds.

The agency will work with stock exchanges to minimize speed differences between the public data feed and high-speed direct feeds typically used by high-frequency firms, Ms. White said. SEC staff also will examine whether exchanges can de-emphasize speed as a key to successful trading.

Ms. White said she will direct the agency's staff to examine whether SEC rules such as Regulation National Market System, or Reg NMS, have in ways worsened market quality by spreading trading across multiple venues. Critics say the system, which requires buy-and-sell orders to be routed to whichever venue has the best price, has spawned new exchanges and dark pools and put a premium on speed.

Bradley Hope and Andrew Ackerman contributed to this article

Write to Scott Patterson at scott.patterson@wsj.com



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