High-frequency and other proprietary traders will be overseen by the Financial Industry Regulatory Authority under a proposed rule announced by the Securities and Exchange Commission on Wednesday.
SEC commissioners voted unanimously to propose requiring proprietary trading firms to belong to FINRA, unless they limit their business to a particular exchange. The SEC will allow 60 days for public comments before finalizing the rule at a future date.
Until now, Section 15(b)(8) of the Exchange Act required broker-dealers to be members of national securities associations but allowed some broker-dealers to engage in significant off-exchange proprietary trading without doing so. “The proposal before us today is designed to close this regulatory gap,” SEC Chairwoman Mary Jo White said during commission deliberations.
“Rule 15b9-1 was implemented at a time when our equity market structure was dominated by floor-based exchanges that could readily regulate all of their members' trading activity. … That is not our market today. Trading is now dominated by computer algorithms and active cross-market proprietary trading firms have emerged as significant market participants. These firms represent a significant portion of off-exchange trading, accounting for nearly half of all orders sent to alternative trading systems,” Ms. White said.
“This measure would significantly strengthen regulatory oversight over active proprietary trading firms and the strategies they use,” Ms. White said. In a statement, FINRA officials agreed and said they will tailor trading activity fee rules accordingly.
The SEC will keep an exemption for floor-based dealers to allow them to engage in hedging transactions off-exchange without triggering the association membership requirement and unnecessary costs. Ms. White said the narrowly tailored exception was strict but workable.
