Financial Regulatory Forum

SEC faces challenges before fast-trading reforms can go on the books

By Emmanuel Olaoye, Compliance Complete

The Securities and Exchange Commission has rolled out its intentions to regulate high-frequency trading, making stricter regulation in some form a strong possibility, but the agency faces more work and some challenging obstacles before it can put new rules in the books.

SEC Chair Mary Jo White in a speech last week outlined her goals for regulating high-frequency trading (HFT), at a time when political interest over the fairness and risks of the practice has surged in the wake of a best-selling book by financial writer Michael Lewis.

White‘s intentions for regulating high-frequency trading, which has taken a dominant role in U.S. equity markets, include registration requirements for proprietary fast-traders. Under such rules, firms registering as broker dealers would have to meet net capital requirements and establish adequate risk management controls.

The agency is also working on a rule to restrict disruptive trading rule. The rule would apply to proprietary traders in “short time periods when liquidity is most vulnerable and the risk of price disruption caused by aggressive short-term trading strategies is highest.”

The initiatives sound good on the surface but the SEC needs to work out the details, said Bernard Donefer, a professor of information systems in financial markets at Baruch College in New York. This includes learning more about the trading strategies of HFT firms before forcing them to register.

Book by high-profile author Lewis may spur high-frequency-trading reform push, success unclear

By Emmanuel Olaoye, Compliance Complete

WASHINGTON/NEW YORK, Apr. 2, 2014 (Thomson Reuters Accelus) - During a clip on Sunday night’s “60 Minutes” program, host Steve Kroft asked bestselling author Michael Lewis why he was so opposed to high frequency trading.

“If it wasn’t so complicated, it would be illegal,” said Lewis, who is the author of a new book called “Flash Boys: A Wall Street Revolt.”  (more…)

Kill switches may be too difficult to implement despite new call by CFTC member, expert says

By Emmanuel Olaoye, Compliance Complete

WASHINGTON, Oct. 17 (Thomson Reuters Accelus) - CFTC Commissioner Bart Chilton has called for high frequency traders, or “cheetahs” to face so-called kill switches that would shut down a broker dealer’s trading over erroneous orders or technology glitches. But a trading expert said the measure may be too difficult to implement in practice.

The problem with kill switches lies with the timing of the decision to turn off electronic trading, said Bernard Donefer, a professor of Trading Technology and Risk management in financial markets at Baruch College and NYU Stern School of Business.  (more…)

Regulators globally seek to curb supercomputer trading glitches

By Christopher Elias

LONDON, Aug. 31, (Business Law Currents) - A series of stock market glitches has prompted regulators around the world to introduce new regulations to limit the impact of computer malfunctions on trading. Shielding markets from another Knight Capital disaster, the new rules seek to defend market participants from malicious machines and risky robots. (more…)

U.S. financial regulation: Three things to watch, and two not to, in 2011 – Complinet column

MARKETS-STOCK/By Scott McCleskey, Complinet

The past year was a busy one for those interested in financial reform – you know, Dodd-Frank and all that. But the new year will be even more fateful in shaping the markets for decades to come. It is likely to be the most critical of the post-financial crisis period. The reason is that Dodd-Frank only gave the regulators their marching orders, and 2010 mostly saw just the preliminaries to the really tough regulation. It will be in 2011 that actual rules will be proposed, finalized and implemented – and all by mid-year, if deadlines are met. It will also be when the Republicans hit the beach in the House and attempt to moderate or reverse many of the reforms already underway.

There will be a tidal wave of Dodd-Frank work, and some areas of focus are already obvious. The launch and first steps of the Consumer Financial Protection Bureau will be one, and the rather iffy implementation of derivatives regulation will be another. These items have been and will continue to be covered by this organization and others. But there are other items largely outside the Dodd-Frank ecosystem which bear a close watch over the coming year – and there are also some receiving a lot of press lately which can be ignored. (more…)

Regulation and the day the machines took over -The Scott McCleskey Report

HIGHFREQUENCY/By Scott McCleskey, Complinet

It took five months, a PhD in Physics, a Nobel Prize winner and a staff of quants, but the SEC and CFTC have now figured out what happened to the markets during the “flash crash” in May. Given the well-orchestrated string of sneak-peeks the SEC had given before the publication of the joint report,  the findings weren’t particularly surprising. Nevertheless, they are enlightening both for what they tell us about the state of the markets and for what they tell us about the assumptions we have made when regulating them. The upshot: markets aren’t efficient, and rulemakers should stop acting as if they are.

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ANALYSIS-Study casts doubt on traders’ ‘raison d’etre’

By Herbert Lash

NEW YORK, Oct 12 (Reuters) – A new study about May’s “flash crash” casts doubt on two basic premises of high-frequency traders: that they help markets function properly by providing liquidity and that they smooth out price volatility.

High frequency traders have pointed with glee to the fact a mutual fund company, identified as Waddell & Reed Financial Inc, helped trigger the steep market plunge on May 6, as outlined by U.S. regulators in a report almost two weeks ago.

Yet the new study by staff of the Commodity Futures Trading Commission to be unveiled on Tuesday not only gnaws at the service high-frequency traders claim to provide but says their response to that day’s slide sparked greater volatility. (more…)

ANALYSIS-SEC panel pits wider debate over automated trading

By Herbert Lash

NEW YORK, June 22 (Reuters) – U.S. security regulators have billed a panel they host on Tuesday as a talk about liquidity, yet really at issue are the fading ideals of long-term investing and the brave new world of rapid, automated trading.

The Securities and Exchange Commission has brought together some of the biggest practitioners of “high frequency trading” — Tradebot Systems and Jump Trading LLC — and a flag bearer of deep value investing, Southeastern Asset Management Inc.

The title of the discussion, a “perspective on liquidity,” is apt considering the SEC and the Commodity Futures Trading Commission have identified a breakdown in liquidity as one of the likely causes of the still unexplained May 6 flash crash.

Europe exchanges’ pre-trade safety seen at risk

By Jane Baird

LONDON, May 7 (Reuters) – The safety systems of Europe’s stock exchanges are at risk of being eroded by market pressures and experts say regulators need to act to head off a computer-driven tailspin like the one that hit U.S. stocks on Thursday.

Europe’s big exchanges are still less vulnerable than their U.S counterparts to error-induced convulsions similar to the Dow Jones Industrial Average’s nearly 700 point drop in 10 minutes, but a race for speed is pressuring them to weaken their safety controls

“European exchanges are being forced by commercial pressures to slim down their platforms and show faster and faster trade times, which means they are at risk of eventually cutting off their circuit-breakers. Meanwhile, there are no regulatory counter-measures to pre-empt it” said Frederic Ponzo, a managing partner at Greyspark Partners.

BREAKINGVIEWS-Market turmoil recalls 1987′s electric nightmare

– The author is a Reuters Breakingviews columnist. The opinions expressed are his own –

By Nicholas Paisner

LONDON, May 7 (Reuters Breakingviews) – The cancellation of share trades by a stock exchange has a third-world feel about it. But Thursday’s unfeasibly large swings in some U.S. stocks prompted NASDAQ to annul trades printed at seemingly silly prices. In one of the most frenzied sessions in living memory the equity market fell victim to a combination of fear, human error and — above all — technical malfunction.

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