The SEC Hints at New Regulations for High Speed Traders

“WASHINGTON—Securities and Exchange Commission Chairman Mary Schapiro said Wednesday she is worried about the role of high-frequency traders in the stock market and hinted at new policies aimed at curbing frenetic market activity.

A large portion of trading in the equities market has little to do with “the fundamentals of the company that’s being traded” and more to do with “the minuscule aberrational price move” that computer-assisted traders with direct connections to the exchange can “jump on” in fractions of a second, Ms. Schapiro said.

Associated PressMary Schapiro

Such activity “worries me,” she said in a wide-ranging breakfast meeting with reporters. One solution would be forcing high-frequency traders to pay for the canceled trades that make up more than nine-tenths of their orders, she said. Another remedy: requiring such traders to maintain competitive buy and sell orders in the market throughout most of the trading day.

Worries about high-speed trading have been mounting inside the SEC for years, but Ms. Schapiro’s remarks Wednesday indicated a heightened sense of concern and indicate the agency could take aggressive action to rein in the practice.

Many high-frequency trading firms, which move in and out of stocks rapidly using powerful computers, place their computer servers nearby an exchange’s computers in the same facility, an activity known as collocation. Ms. Schapiro did say that high-frequency traders provide liquidity to markets, “and that’s a great thing, it’s lowered the cost of trading.”

She said some of her concerns about high-speed trading were sparked by the May 6, 2010, “flash crash,” when the stock market suffered a massive dislocation and the Dow Jones Industrial Average plunged hundreds of points in a matter of minutes before recovering some of the lost ground. An SEC report after the crash found that many high-frequency firms stopped trading during the upheaval, and some placed added pressure on the market by selling their positions….”

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