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November 2, 2011

Market Makers Under Fire From SEC

By Peter Chapman

The Securities and Exchange Commission is considering rules that could limit trading by market makers during topsy-turvy markets.

Speaking at an industry conference last month, David Shillman, an associate director in the SEC's Division of Trading and Markets, told attendees the regulator was mulling the imposition of "negative obligations" on dealers in certain circumstances. If the stock market were to get overly frothy, as happened during the flash crash of May 2010, these restrictions would bar market makers from conducting trades that might exacerbate the situation.

"The notion of negative obligations is a promising one," Shillman said at the annual market structure conference of the Securities Industry and Financial Markets Association. "What we saw on May 6 was that some of the high-frequency trading firms were very aggressive. They were taking liquidity. The question is: Is it appropriate in volatile situations for a market maker to be taking liquidity?"

In general, negative obligations bar registered market makers from trading, while positive obligations require them to trade.

Shillman's comments drew mixed reactions from market makers. "I'm OK with a regulator saying that in certain circumstances a firm shouldn't add to the disruption of the market," Chris Concannon, a partner with Virtu Financial, told SIFMA attendees. "That's an OK restriction to live by as a market maker."

Adam Nunes, in charge of business development at Hudson River Trading, was more circumspect. "The whole idea of proprietary trading firms exacerbating volatility hasn't been borne out as true," he said. "That's what we learned from the papers in the Foresight Programme."

The British government's Foresight Programme, a research organization that studies the impact of science and technology on society, recently tackled the controversial topic of high-frequency trading.

 


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