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SEC sets sights on sponsored access and exchange co-location

27 October 2009  |  8318 views  |  1 Statue of Liberty

After taking on dark pools and flash orders, the Securities and Exchange Commission has now turned its attention to high frequency trading and the practice of sponsored access to exchanges.

In a speech at the Sifma annual conference, SEC chairman Mary Schapiro told delegates that the regulator is drafting a proposal on sponsored access, focussing on arrangements that enable unfiltered access by non-regulated entities - in many cases, high frequency traders - to exchange systems.

"I liken it to giving your car keys to a friend who doesn't have a license and letting him drive unaccompanied," says Schapiro.

She argues that broker-dealers act as gatekeepers, maintaining the integrity of markets and that this should not be sacrificed "to give a trader a millisecond advantage".

Schapiro has also asked SEC staff to find ways to shed light on high frequency traders, who now account for more than 50% of volume.

"I believe we need a deeper understanding of the strategies and activities of high frequency traders and the potential impact on our markets and investors of so many transactions occurring so quickly. And we need to consider whether there are additional legislative authorities needed to address new types of market professionals whose activities may not be sufficiently regulated," she says.

In addition, the watchdog expects to seek public comment on co-location - the process where exchanges allow some broker-dealers to place their servers close to the matching engine of the bourse. Shapiro is worried that this offers "significant advantages" for traders who rely on speed.

The SEC has already proposed a ban on flash trading - which gives some investors a sneak peak at open order before the wider market - and last week made three specific proposals aimed at strengthening the regulation of dark pools.

Meanwhile, with the use of dark pools and high frequency trading under intense scrutiny, Goldman Sachs - which runs the Sigma-X platform - has been defending the practices to the SEC.

In a recent memo to the watchdog, the investment bank says dark pools "are a technological evolution of classic market structure that have brought benefits to institutional and retail trading alike".

Comments: (1)

A Finextra member
A Finextra member | 28 October, 2009, 04:43

One can only imagine that it is all good and that the players will find the spotlight welcome along with all the free publicity.

If it is so good for us then their business will thrive, and we'd never have known what we were missing out on would we?

If it isn't then we will have strengthened the market structures.

Either way nobody loses in the long term do they? The participants certainly don't want to kill the markets, but the markets may not be able to afford a private golden goose.

I just can't help get that feeling that I could game such a system and expect that others who are brighter might also.  Something in the mathematical equations disturbs my peace of mind...

Enlighten me.

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