SEC Starting to Target High-Frequency Trading

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Matthew Philips

The arcane world of high-frequency trading, in which sophisticated investors use computer programs to buy and sell huge amounts of stocks at breakneck speeds, is one of the least understood practices in the market. It's also one of the most pervasive. Upwards of 70 percent of all equity-trading volume in the U.S. is done by high-frequency traders. Proponents say it creates valuable liquidity by quickly matching buyers and sellers. Critics say it allows banks and hedge funds with the best code writers and fastest computers to prey on less-sophisticated investors, and possibly even engage in fraud by getting ahead of orders from their own clients and taking advantage of small differences in price. What's certain is that we don't know enough about it. A recent poll by Greenwich Associates found that 20 percent of institutional investors, like mutual funds, don't fully understand the practice. The issue's gaining steam in Congress, where a few members have been prodding the SEC to take action. At an Oct. 28 Senate banking-subcommittee hearing, an SEC official said the regulator intends to take a "deep dive" into high-frequency-trading issues. The SEC has already proposed a ban on flash orders, in which exchanges give certain traders a millisecond's peek at investors' orders before they're filled. SEC chairwoman Mary Schapiro has indicated the need to overhaul outdated regulations despite the protests of Wall Street: "We should not sacrifice the stability and fairness of the markets to give a trader a millisecond advantage."

Tag(s): November 16 2009 issue

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