By Nina Mehta and Josh Gallu
The U.S. Securities and Exchange Commission is examining equity trading practices that gained dominance in the past decade amid a shift to automation, according to an official in the agency’s enforcement division.
Daniel Hawke, head of the market-abuse unit, said at an event yesterday that the SEC is looking into techniques such as co-location, in which exchanges let traders place computers close to the market’s systems to shave time off executions. He said other practices under examination include the rebates that venues pay to spur transactions, direct market access where brokers let investors send orders to venues themselves, and whether the types of orders exchanges offer are being misused.
Regulators are evaluating U.S. markets after rules since the 1990s boosted competition and spread stock trading across 13 exchanges and dozens of private, broker-run venues. While the shift cut investors’ costs, it made trading more complex, and scrutiny increased after a May 2010 rout erased $862 billion from equities in less than 20 minutes. Several practices Hawke highlighted are used by firms engaged in high-speed trading.
“No one’s been able to prove whether high-frequency trading is good or bad,” Larry Tabb, chief executive officer of research firm Tabb Group LLC in New York, said in a telephone interview. “They don’t have a consolidated audit trail, clean access to good data or the quantitative analysts to really analyze data, so they’re doing it through the resources they have — which is through enforcement.”
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