The majority of market participants agree on the need to eliminate abusive practices no matter the frequency of trading. But one topic that remains an issue of debate is whether firms that employ high frequency trading strategies should be required to register. In Part III of this series, we examine White’s comments on registration and the potential issues associated with such a measure if regulators move forward.
Registration and Firm Oversight
In her speech, Chair White highlighted her request to SEC staff to prepare two recommendations around firm registration:
- “A rule to clarify the status of unregistered active proprietary traders to subject them to our rules as dealers;” and
- “A rule eliminating an exception from FINRA membership requirements for dealers that trade in off-exchange venues.”
The desire for registration is an easy one to understand: if there is an active market participant it makes sense for the regulators to know who they are. No one should be able to operate under the radar. In fact, many proprietary trading firms are registered already, either as dealers or with the exchanges on which they trade. In this case, there are two questions that the SEC staff is surely asking themselves: is dealer registration the appropriate registration and why does mandatory registration need to apply to more than just proprietary traders?
Further along the lines of oversight, Chair White has asked “staff to prepare recommendations for the Commission to improve firms’ risk management of trading algorithms and to enhance regulatory oversight over their use.” With algorithms being used by most across the spectrum of market participants, it is understandable that the SEC would want a better handle on understanding and monitoring the algorithms and their risk. But the devil is in the details, especially when it comes to those “poorly designed and operated.”
It will be interesting to see how the SEC proposes to oversee firms’ algorithms. There are many issues that need to be addressed in this proposal. Not the least of which is understanding the algorithms. It is one thing to review an algorithm; it is another to fully understand it. Firms of all stripes invest a great deal of money in talent who can fully understand how algorithms will behave in the market; regulators do not. The SEC is currently improperly staffed for undertaking such a task. Another important issue will be guaranteeing the protection of intellectual property, which is critical for firms who use algorithms.
Chair White has a tall task but is taking a thoughtful approach. Certainly, there will be more to come on this topic.
