On Thursday, SEC Chair Mary Jo White, speaking at a Wall Street investment conference, announced a slew of investigations, potential rule changes, and monitoring methods that could lead to a significant crackdown of high-frequency trading (HFT).
The list of investigations was lengthy. White said the SEC is looking into whether exchanges allow HFT firms to place their buy and sell orders in ways that give them an advantage over other traders. The SEC is looking into whether so-called dark pools, where some investors try to mask their trading activity, should be forced to report more of their transaction data. White also noted that the SEC is looking at whether exchanges should be giving trading data to some HFT firms faster than everyone else. On top of that, the SEC is going to look at whether exchanges should try to de-emphasize speedy trading.
White said that she is also examining whether the market is too fragmented. There’s an SEC committee looking into that, and market structure in general, as well.
So, pretty much everything you can think of about high frequency trading is under review.
That might lead you to believe that the SEC, after years of looking at HFT, has finally came to the conclusion that it is bad, except for this: There is very little in what White announced that directly seems like a crackdown of high frequency trading firms. Most of the potential changes White announced had to do with the exchanges.
The one major change for HFT firms is that they have to register as brokers with the SEC. HFT firms have long made the argument that they are basically market making firms, helping others, albeit indirectly, trade. By having them register as brokers, the SEC basically validates the argument that these firms service the market and other traders, even if the only trading they do is with their own cash. So, while the SEC will get to monitor HFT a little more closely, its moves will also make HFT a little more legit.
The SEC’s initiatives come roughly a month after the publication of Michael Lewis’ Flash Boys, an account of HFT that basically calls all HFT firms a bunch of crooks. So you can’t fault the SEC for announcing something. Its job is to make the market look fair. And if you don’t know what to do, announcing that you are reviewing everything you can think of isn’t the worst approach. But it’s also a sign that in the end the SEC might end up deciding not to do a heck of a lot.