TOPICS > Economy

SEC seeks to rein in unfair practices of high-frequency trading

June 5, 2014 at 6:46 PM EST
The chair of the Securities and Exchange Commission laid out new rules to regulate high-frequency trading. Critics have argued that high-speed, computer trading gives a small group of traders an enormous advantage over the general public. Judy Woodruff talks to Bloomberg News reporter Keri Geiger for a closer look at the potential changes.
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JUDY WOODRUFF: Finally tonight: A federal agency is proposing new rules for financial markets to help them address changes in the way the majority of trading takes place today, dizzying changes in technology and a lessening of transparency.

There’s been mounting concern among some experts in particular about computer-driven high-frequency trading after a one-day market crash in 2010 and a recent high-profile book on the subject.

Mary Jo White, who is the chair of the Securities and Exchange Commission, laid out new proposals to regulate the market during a speech today.

Reporter Keri Geiger of Bloomberg News is here to fill us in.

Keri Geiger, welcome to the program.

KERI GEIGER, Bloomberg News: Thank you very much. Happy to be here.

JUDY WOODRUFF: So, give us a fuller picture of how the markets have changed and what precipitated all this.

KERI GEIGER: Well, this really — you know, high-frequency trading has been a discussion for many years, especially after the flash crash.

And it really quieted down. And then in March 2000 — or March 2014 of this year, just a few months ago, the New York attorney general, Eric Schneiderman, opened up a broad investigation into high-frequency trading and some of the practices behind that, including the technologies that really drive this super fast trading where, to kind of future into perspective, it’s about 1,000 trades can happen in the blink of an eye with this computer-driven trading.

And his investigation and the New York state attorney general’s investigation coincided with the publication of Michael Lewis’ book “Flash Boys,” which, of course, brought the issue of high-frequency trading to the general public and really showed how a lot of people — and there’s a lot of critics in this market, as well as proponents — but the critics were really looking and saying that this provides a small number of traders with an enormous advantage over the general public, including retail advantage — retail investors.

So, you know, here we are today, the A.G. investigation, “Flash Boys,” and now the SEC is likely responding to a lot of that pressure and is looking at ways that they can roll out some new rules that will essentially rein in what is considered some of the unfair practices of high-frequency trading.

JUDY WOODRUFF: So, what — I mean, without getting in — too much into the details, what is it that Mary Jo White, the chair, would like to see done?

KERI GEIGER: Well, one of the most significant ones, which was highlighted back in March, when the A.G. opened their investigation, is the issue of dark pools.

Now, dark pools are run by some of Wall Street’s biggest banks. And it’s essentially trading behind closed doors. You don’t see how the trades are done, the buying and the selling, unlike the exchanges, which just shows up on a public ticker.

And Mary Jo White and the SEC is calling for some of the trades and the ways those dark pools are operated to have more disclosure and transparency.

Another thing is that firms — proprietary trading firms that engage in high-frequency trading have to have registration with the SEC, which would essentially make them accountable to SEC rules and regulations. Also, order flow types — when orders are put in through certain alternative trading venues that use high-frequency trading, you don’t — they don’t necessarily tell their customers where they are being routed.

And not to get too technical, but that is actually an issue for a lot of customers, and so they would like to actually have some transparency on that. So the big theme basically that came out of the SEC today with the proposal of rules is more transparency in the markets.

JUDY WOODRUFF: And so is — are these the kinds of changes, Keri Geiger, that are likely to be accepted in the financial market community?

KERI GEIGER: You know, the market has surprisingly been pretty accepting of the proposal that the markets get more transparent and we kind of understand and learn more about how high-frequency trading might create unfair advantages.

So I think you’re likely going to see — considering that the regulators, as well as the New York attorney general and other, you know, kind of government bodies are really looking at ways to kind of open this up, you are going to see the market sort of getting behind them on this.

Also, Michael Lewis’ book has had a lot of influence on the way the public looks at this. So, there is a public perception issue with how people are going to be responding to this.

JUDY WOODRUFF: And just to — quickly again to help the audience understand this, the high-frequency trading, you are saying, is often accompanied by less transparency in what is going on?

KERI GEIGER: That is absolutely the case.

And that is where a lot of this criticism draws. The whole market of high-frequency trading has grown up very quickly in the last few years. And a lot of people don’t understand it. We don’t see a lot of the ways that the data and the trades are processed just by the way the system is set up.

So that is definitely a major issue for this. And it’s something that people want to see more of.

JUDY WOODRUFF: So, finally, what happens next? I mean, what — who gets a chance to look at these recommendations? And when do we know whether this actually is going to take effect?

KERI GEIGER: Well, this is going to be a process that the SEC will go through. And they will be keeping the public up to date on where they are in this process.

Of course, there is a review period that has to go on here. So this is definitely a work in progress. We’re in a little bit of wait-and-see mode to see, one, how the market is going to react to this, and at which the speed that the SEC can put some of these changes through.

JUDY WOODRUFF: Keri Geiger with Bloomberg News, we thank you.

KERI GEIGER: Thank you very much.