SEC Data to Transform High-Speed Trading Debate, White SaysDave Michaels
The U.S. Securities and Exchange Commission plans to unveil a public website next week that will allow it to publish data, research and analysis using the type of robust market data exploited by high-frequency trading firms.
The site will share some of the agency’s research into topics such as strategies that cancel a high percentage of orders, which can give the appearance of false liquidity, SEC Chairman Mary Jo White said today at a speech in Washington. It also will allow users to explore trading-activity patterns in “easy-to-read charts and graphs,” she said.
The SEC’s effort is meant to use data-driven analysis to determine if technology has given some sophisticated traders an unfair advantage. The regulator has worked to improve its understanding of market behavior after taking more than four months to explain the May 2010 flash crash, when about $862 billion in U.S. equity value was wiped out in minutes before share prices recovered.
“We expect this new tool to transform the debate on market structure by focusing as never before on data, not anecdote,” White said in prepared remarks for the Security Traders Association’s market structure conference.
The SEC’s data-mining effort was boosted by its acquisition of Midas, an acronym for Market Information Data Analytics System. The agency acquired Midas last year from Red Bank, New Jersey-based high-frequency trading firm and technology vendor Tradeworx Inc.
Midas provides the regulator with more complete data than traders and researchers can see from the public price feeds operated by NYSE Euronext and Nasdaq OMX Group Inc. Midas includes every order on exchanges, not just the best offers reported to the public tape. It also gathers data on orders that are modified, canceled or filled.
White said in April that the SEC needed to bring a “sense of urgency” to answering whether high-frequency trading, dark pools and the proliferation of complex order types harm retail investors or create an uneven playing field.
Since then White has grappled with technology failures, including the Aug. 22 malfunction of Nasdaq’s price feed that caused it to call a three-hour trading halt in thousands of stocks. White met with the chief executive officers of U.S. stock exchanges on Sept. 12, asking them to provide ways to make the price-data feeds more resilient.
“We must address these risks by striking the right balance of reliability, functionality and cost,” White said today in her speech.
Data may enable the SEC to reconsider long-held assumptions about exchanges and market rules, including the exchanges’ role as regulators of their member brokers while competing with them for trading business and data sales, White said. The exchanges’ business models and regulatory roles should be “fully evaluated in light of the evolving market structure and trading practices.”
“This evaluation should also assess how trading venues can better balance their commercial incentives and regulatory responsibilities,” White said. “For example, is there an appropriate balance for exchanges in key areas, such as the maintenance of critical market infrastructure?”
In a July 31 letter, the Securities Industry and Financial Markets Association asked White to review the self-regulatory status that gives exchanges oversight of brokers, which also run competing trading venues.
“Conflicts of interest in this model abound and only worsen as they are left unresolved,” Theodore R. Lazo, associate general counsel at Sifma, said in the letter.
Nasdaq supports efforts to “tackle the complex market structure issues our industry faces,” Chief Executive Officer Robert Greifeld said in an e-mailed statement after the speech.
White said data also will let the SEC consider whether trading rules should distinguish between stocks depending issuer’s size. The regulator is continuing to develop a plan for a pilot program that would increase the minimum quoting increment for smaller stocks, which some brokers and companies say would boost liquidity. The current minimum quoting requirement is for 1-cent increments.
White expects the SEC staff to recommend such a pilot program, which would require approval by the five-member commission, she said in an interview after her speech. White declined to say when she expects the project to move forward.
“I have instructed the SEC staff to move forward on earlier efforts to work with the exchanges as they develop and, if possible, present to the Commission for its consideration a plan to implement a pilot program that would allow smaller companies to use wider tick sizes,” White said in the speech.