Two practices widely employed by hedge funds could be changed dramatically by tougher regulations proposed by the Securities and Exchange Commission.
SEC Chairman Mary Jo White announced yesterday that it would increase its scrutiny of high-frequency trading and dark pools. The move comes amidst a furor surrounding HFT following the publication of Michael Lewis’ book, Flash Boys, which alleges that HFT is a form of insider-trading and that the U.S. markets are “rigged.”
White suggested that the SEC would require high frequency traders to register with the SEC as broker-dealers. The regulator also plans a rule to block such firms from short-term strategies that increase volatility and to consider whether to continue to allow certain complex order types that allegedly give high frequency traders an unfair advantage.
White said that technological innovation, while “greatly” increasing efficiency, “can also allow severe problems to develop very quickly.”
The SEC chief also took aim at the off-exchange trading venues known as dark pools, which do not disclose buy-and-sell orders like exchanges. She said the SEC and FINRA would work together to increase reporting requirements for dark pools and other off-exchange venues, and may require that brokers disclose their routing decisions for large orders.
“Transparency has long been a hallmark of the U.S. securities markets, and I am concerned by the lack of it in these dark venues,” White said.