U.S. regulators looking into high-frequency trading have asked the industry if institutions are flocking to so-called dark pools and increasing market volatility, sources familiar with the SEC's line of questioning said on Monday.
The Securities and Exchange Commission is not expected to release a discussion paper on high-frequency trading and other market developments being scrutinized by some lawmakers at least until December, the sources said.
High-frequency trading now accounts for an estimated 50 percent to 70 percent of all U.S. equity trading and is growing fast in other regions and asset classes. In it, banks, hedge funds, and independent shops use ultra-quick algorithms to make markets and capitalize on tiny spreads and market imbalances.
Some politicians and investors have raised concerns the practice, which effectively replaced traditional market-makers over the last decade, creates a two-tiered market favoring the most sophisticated players.
On Wednesday, a congressional panel will examine high- frequency trading and other recent market developments such as so-called dark pools, or anonymous trading venues where quotes are not displayed publicly
The SEC has said it wants to issue the discussion paper, in which it will ask questions about whether the rules have kept up with the current market structure to better understand the impact of high-frequency trading, which remained one of the most profitable lines of business throughout the financial crisis.
The discussion paper or so-called concept release can be a precursor to rule making and will be open for public comment.
One source said SEC staff have spoken first-hand to some high-frequency shops about volatility and how buyside firms are reacting to faster markets, adding that the staff is still in gathering information.
A second source said the regulator was also asking whether the shift to dark pools was increasing volatility in the public markets.
The SEC has already proposed ways to shed light on the dark pools and has proposed banning so-called flash orders, which give advance knowledge of stock orders to certain traders.
(Reporting by Jonathan Spicer in New York and Rachelle Younglai in Washington; editing by Matthew Lewis and Andre Grenon)