The Securities and Exchange Commission has knocked back proposals by Nasdaq that would have allowed the exchange to compete with US brokers in the provision of algorithmic trading software tools.
The US exchange operator in May asked the SEC for permission to begin offering a new 'benchmark orders' programme to member firms. This would offer three basic algorithmic trading strategies that would channel orders at either a volume-weighted average price, time-weighted average price, or as a percenage of trading volume.
In rejecting the proposals, the regulator says that Nasdaq failed to specify how the new service would comply with rules requiring orders to be checked for risks before they are sent out to the market.
The SEC was particularly concerned about a potential conflict with other rules that provide immunity for exchanges when problems arise from trading glitches.
The watchdog says that Nasdaq didn't deal with competition concerns raised by large broker-dealers, who supply similar services to sell-side institutions and smaller brokers, and who face unlimited liability in the event of a service breakdown.