U.S. regulators are searching for ways to peer into the activities of high-frequency trading, which has blossomed in recent years and now accounts for at least 50 percent of all equity trading in the United States.
At a congressional hearing to examine high-frequency trading and other market developments such as so-called naked access and dark pools, the Securities and Exchange Commission said it seeking ways to secure better information about the fast traders.
This would help the commission's ability to identify large and high-frequency traders and their affiliates, James Brigagliano, a co-acting director of the SEC's markets division, told a Senate Banking subcommittee hearing.
High-frequency traders use computer algorithms to buy and sell shares at lightning speed, and they gain additional millisecond advantages by renting access from brokerages approved to trade on an exchange. Dark pools are the 40-odd alternative venues where orders are anonymously matched so that investors can hide their intentions.
Lawmakers voiced concerns about market developments creating an uneven playing field that favors large securities firms and sophisticated institutional investors.
The SEC is already crafting proposed rules to shed light on the fast trades and curb naked access, or the practice of brokers giving high-frequency traders unfettered entree to public markets.
The agency has already proposed ways to shed light on dark pools, which are private, anonymous, electronic trading venues that compete with exchanges for their largest, most profitable orders. It has also proposed banning so-called flash orders, which give advance knowledge of stock orders to some traders.
When pressed by Democratic Senator Charles Schumer on whether the SEC might consolidate surveillance across all markets, Brigagliano said: We are moving to consider that ... We think it would be a benefit to centralize surveillance.
U.S. market surveillance is shared by in-house teams at trading venues and broker-dealer watchdog the Financial Industry Regulatory Authority. The SEC oversees the stock markets.
The subcommittee also heard from The Security Traders Association and electronic stock trading platform Direct Edge, among others. All agreed that naked access poses systemic risk concerns without the proper controls.
One minor mistake in order entry could become a major problem across many different trading venues if trades are allowed to bypass risk management tools, said Peter Driscoll, the chairman of the Security Traders Association.
(Reporting by Rachelle Younglai, editing by Gerald E. McCormick)