Exclusive Online Only ContentMarket Structure Change: Better Audit Trail, More Information on Large Traders Likely to be Sought
October 29, 2009
Witnesses participating in the Senate Banking House and Urban Affairs committee’s hearing Wednesday on dark pools, flash orders and high frequency trading called for more openness in what was basically seen as a well-functioning market structure.
But the desired openness – aka transparency – may mean the collection of more information on customers and an improved audit trail on trades.
In response to questions from Senators, James Brigagliano, co-acting director of the division of trading and markets at theSecurities and Exchange Commission, said such actions may be in store.
Brigagliano said the SEC has identified the “enhancements” it needs to monitor high-frequency trading, which by some accounts makes up 70% of orders today. These include a better transaction audit trail and more information about large traders.
“Who is really behind the trade [and] quicker access to find out who the principles and their affiliates are,” Brigagliano said, “We’re working on developing that capacity and the additional technology to analyze this huge volume of high-speed trading.” The S.E.C. has already proposed rules affecting short selling, flash quotes and dark pools. Another proposal affecting sponsored access, where broker-dealers lend customers their exchange IDs to trade directly on exchanges, is anticipated shortly.
When asked by Senator Jim Bunning (R-Kentucky) whether the SEC had sufficient authority, Brigagliano responded that the agency has “considerable” authority to address the hearing’s issues. He added that legislation in Congress to regulate OTC derivatives and hedge funds would serve as “important adjuncts to our authority.”
Bunning also asked whether the SEC would review the maker-taker pricing model used by most quote-displaying markets, in which the venues provide a mixture of fees and rebates for different types of orders. “Is the commission going to look at these practices, especially with regard to high-frequency traders” whose business models focus on collecting rebates? Bunning asked.
Brigagliano said it “would make sense” to look at the effect of pricing models on trading behavior.
Today, market centers, whether exchanges or dark pools, monitor their own trading activity but cannot see the activity at other market centers, even though traders today, and especially high-frequency traders, tend to trade at multiple destinations.
Senator Charles Schumer (D-New York) called for a market-wide surveillance system, and Brigagliano said the SEC was “moving forward” on the notion. “That has to be an important element of enhancing our ability to surveil. As we move forward developing a better audit trail and surveillance, that concept has to be part of it,” he said.
