The US Securities and Exchange Commission moved on Wednesday to crack down on high-frequency traders who have “unfiltered” or “naked” access to stock markets as it revealed other actions to plug regulatory gaps and strengthen enforcement.
The move came as NYSE Euronext revealed that it had for the first time fined a trading company for failing to control its trading algorithms in a case that highlights the pitfalls of the rapid-fire electronic trading that has come to dominate many markets.
The group, which operates the New York Stock Exchange, said it had fined Credit Suisse $150,000 after a case in 2007 when hundreds of thousands of “erroneous messages” bombarded the exchange’s trading system.
While trading “outages” are relatively common at exchanges, there is increasing concern that trading systems could be jeopardised by the rapid growth of algorithmic trading, especially by high-frequency trading done by banks and companies that specialise in such trading.
The SEC’s proposed rule on “naked access” would effectively prohibit high-frequency traders – who conduct lightning-fast trades – and others from bypassing the risk management controls brokers would have to establish to prevent erroneous orders and potential breaches of credit or capital limits.
“Unfiltered access is similar to giving your car keys to a friend who doesn’t have a licence and letting him drive unaccompanied,” said Mary Schapiro, the SEC chairman.
“Today’s proposal would require that if a broker-dealer is going to loan his keys, he must not only remain in the car, but he must also see to it that the person driving observes the rules before the car is ever put into drive.”
A recent report estimated that naked access accounts for 38 per cent of the daily volume for equities traded in the US markets, according to the SEC. But some traders have estimated that “naked” access trades make up about half US daily share turnover.
The SEC also announced a set of measures designed to encourage individuals who may be complicit in wrongdoing to come forward early and assist in investigations.
“Co-operating witnesses can be the master key that unlocks the intricacies of cases involving complex transactions that might otherwise escape detection, or enable authorities to apprehend the higher-ups whose culpability can be the most challenging to establish,” said Robert Khuzami, head of the enforcement division.
The SEC also released details of its review of the structure of equity markets, including the impact of high-frequency traders and trading that occurs in the “dark” or trading centres that allow the anonymous matching of trades.