SEC Chairwoman Mary Schapiro on Wednesday said her agency will examine whether market participants who buy and sell thousands of shares in milliseconds should face restrictions on their trading strategies.
“High-frequency trading firms are subject to very little in the way of obligations,” Ms. Schapiro said at an event held by the Security Traders Association in Washington. “We will consider carefully whether these firms should be subject to an appropriate regulatory structure governing key aspects of their market behavior, including quoting and trading strategies.”
The SEC is increasingly signaling concern that a surge in computer-based trading, accounting for more than 50% of the daily volume in stocks, has outpaced regulation. The agency faces pushback from hedge funds and other financial firms, which say that new rules shouldn't be imposed without specific evidence that high-frequency trading hurts markets.
The May 6 plunge in stock prices, in which $862 billion was temporarily erased from the value of U.S. equities in less than 20 minutes, has prompted regulators to question whether markets can “handle the high-speed, preprogrammed trading algorithms that generate much of today's trading volume,” Ms. Schapiro said.
The SEC responded to the drop by implementing halts on stocks whose prices move at least 10% in five minutes. It may adjust those circuit breakers to reduce the likelihood that errant transactions will trigger the curbs, Ms. Schapiro said.
Limits on the prices at which trades occur could be introduced, with circuit breakers triggered only if prices don't improve “within a preset period of time,” she said.
The watchdog will also reconsider the specifications that trigger circuit breakers, she said. Trading firms that provide “significant liquidity to the market” program their computers to trade less or stop transactions when prices move in unusual ways, she said.
“An important consideration will be how best to prevent these ad hoc circuit breakers from pulling significant liquidity providers out of the markets at moments of extreme volatility, thus leaving the markets to fend for themselves,” she said.
The agency is also concerned that an “out-of-control” computer algorithm could flood markets with orders that inappropriately drive prices up or down, she said.