The top U.S. securities regulator on Friday called for a broad reassessment of high-frequency trading on the one-year anniversary of the so-called flash crash of 2010.
We need to assess the entire regulatory structure surrounding high frequency trading firms and their algorithms, said U.S. Securities and Exchange Commission Chairman Mary Schapiro at a funds conference.
Exactly one year after a sudden drop in U.S. stock markets that shook investor confidence, Schapiro said: High frequency traders turned what was a very down day for many investors into a very profitable one for themselves by taking liquidity rather than providing it.
I think their activity that day should cause us to thoroughly examine their current role.
On the afternoon of May 6, 2010, U.S. stock prices plunged with shocking speed. The benchmark Dow Jones industrial average, after losing about 4 percent of its value through much of the day, plunged roughly 600 points in five minutes.
Then, in equally bewildering fashion, the Dow rebounded nearly as quickly.
Since then, some individual stocks have experienced what some call mini crashes, where shares unexpectedly move on a sudden burst of volume, absent of any news.
The stunning May 6 flash crash has been the subject of study by regulators for months. A panel of experts in February made 14 recommendations, such as stock trading pauses and limit-up/limit-down price bands to calm markets. The panel also suggested firms providing liquidity get trading fee rebates.
The SEC has taken other steps to try to prevent future flash crashes, but Schapiro raised fundamental questions about high-frequency traders in the market.
In her speech to a mutual funds group, she said: Should high-frequency traders, who often derive significant benefit from their role as de facto market makers, also have the obligations of market makers as well as other responsibilities with respect to the impact of their technology and trading strategies on the markets?
Schapiro said regulators are mindful that any curbs on high-frequency traders would have to be carefully crafted to avoid unintended consequences.
Imposing significant obligations for market quality on some firms, but leaving other firms free to operate without those obligations, could create an unfair playing field and, in the end, do little to promote market quality, she said.
(Editing by Derek Caney)