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April 08, 2010 01:00 AM

High-speed traders face order reporting requirement from SEC

Bloomberg
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    The Securities and Exchange Commission may give some firms that engage in high-frequency stock trading identification codes to better track transactions accounting for more than 60% of U.S. volume.

    SEC commissioners will vote April 14 on a proposal to require companies that exceed a volume threshold to report their executions to regulators, the agency said in a statement on April 7. Brokerages would have to maintain records on the orders, the SEC said.

    The agency is evaluating whether strategies used at high- frequency trading firms and hedge funds are degrading the quality of markets by causing volatility or making it more difficult or expensive for investors to complete transactions. Any new rules could impose additional reporting requirements on large brokers, proprietary trading firms such as Getco LLC and RGM Advisors LLC, and hedge funds.

    “We support well-regulated markets where regulators have the tools and information they need to effectively conduct surveillance and better understand market participants,” said Richard Gorelick, chief executive officer of RGM Advisors, an Austin, Texas-based firm that trades multiple asset classes. Mr. Gorelick said he hopes the SEC's definition of large traders “will be broad enough to give regulators the insight they're looking for.”

    New rules are likely to affect both brokers and non- brokers. The SEC hasn't said what the threshold would be under what it calls its large trader reporting authority. The SEC gained this authority from the Market Reform Act of 1990, which Congress adopted after the stock market crash in October 1987.

    Less risk

    The commission's plan is “not a bad idea,” said Jamie Selway, founder and managing director of White Cap Trading LLC in New York. “If the SEC doesn't know enough about certain market participants and strategies, and they need more data and insight to do their job properly, getting them more information is better than risking hasty or uninformed rule writing.”

    The SEC is examining high-frequency trading, private trading venues known as dark pools and the structure of U.S. markets to determine whether it should stiffen regulations. New rules could make certain practices less profitable for some firms and hurt U.S. exchanges or alternative venues, where revenue depends on the liquidity attracted and the number of transactions executed.

    “In general, it makes sense for the SEC to try to get more customer-level information,” said Cameron Smith, general counsel at Quantlab Financial LLC, a Houston-based quantitative research and trading company that does business around the world. “Hopefully they will also look at current reporting requirements and rationalize what they're doing here so they don't duplicate reports.”

    End-of-day report

    Mr. Selway said he hopes the SEC will institute a process such as a report filed at the end of the day instead of a requirement that orders be tagged with data, which would be more cumbersome for exchanges and trading firms. He would also like audit data to be more streamlined.

    The equities industry already has “different flavors of audit trail data, as opposed to other markets like credit default swaps that some claim produced multi-billion-dollar holes in the economy,” Mr. Selway said. He added that an efficient effort to gather information could also spur the commission's plans to create what it describes as a consolidated audit trail across markets and asset classes.

    Any proposal would require a subsequent vote by SEC commissioners to become a binding rule.

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