The Securities and Exchange Commission ("SEC") has proposed a new rule that will attempt to bring firms that engage in high-frequency trading ("HFT") under regulatory supervision. "The proposed amendments to Rule 15b9-1 would eliminate the current proprietary trading exemption and replace it with a narrower rule to exempt only off-exchange transactions by floor-based dealers that are solely meant to hedge the risks of its floor-based activities."1 Specifically, the SEC is proposing that brokers and brokerage firms that are not trading on exchanges to join a national securities association, bringing them under the oversight of the Financial Industry Regulatory Authority ("FINRA").2
As of 2010, it was estimated that HFT is responsible for over 50% of all trading volume in U.S. markets, and it has only become more popular as the technology and algorithms used have improved.3 HFT firms utilize incredibly powerful computers and complex codes to monitor massive amounts of data and complete tens of thousands of trades per day.4 The technology has made it difficult to monitor HFT brokerages, but the many strategies HFT firms can adopt have also posed problems for regulators. They can serve as "market makers," where they supply liquidity for buyers and sellers of certain stocks; they can engage in arbitrage by taking advantage of small price discrepancies of securities listed on multiple exchanges; or, with extreme quickness, they can take advantage of the information lag and subsequent price lag that occurs when large institutional investors buy or sell securities.5
In recent years, there has been a great deal of discussion about HFT's impact on the market and investors. Supporters of regulating HFT point to the "Flash Crash" as an example of how HFT can affect the whole market. On May 6, 2010, U.S. share prices dove over 10%, only to climb back to "pre-crash" values by the end of trading. While the details of the crash are complex, the events showed that HFT can contribute to a decrease in liquidity and may affect market stability. In October 2011, a report issued by The International Organization of Securities Commissions ("IOSCO") also claimed that "HFT may deteriorate investors' confidence in the efficiency and integrity of the market, and possibly, reduce traditional market participants' willingness to trade."6 Additionally, IOSCO offered the possibility that investors who normally buy securities based on their "fundamental value" may be encouraged to leave the market, which could "result in a less efficient price formation process and possibly cause others to reduce their participation."7
The SEC believes that the new rule will not only regulate HFT brokerages, but also will protect investors and help to create more stability in markets. SEC Chair Mary Jo White believes a "regulatory gap" is being closed by allowing for "off-exchange trading" to be monitored. Regulation also will also allow the SEC to gather more data that hopefully will be useful in learning more about HFT and its impact on markets and investors.8
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