A proposed Securities and Exchange Commission rule that would require the most active traders to code their tickets, so that their trading patterns can be tracked by the SEC, appears to have strong support among high-frequency traders themselves.
"It’s important for the regulators to have the information they need to understand the trading markets," said Chris Bartlett, a high-frequency trader at New York-based Nobilis Capital.
The rule in question is the so-called large-trader rule. It would require high-frequency and other large-volume traders to code their trade tickets with a unique identifier. It targets both buyside and sellside shops doing significant volume.
Behind the proposed rule is the SEC’s desire to examine the increasing role that large firms and traders are playing in the markets. According to estimates, between 50 and 70 percent of total volume is done by large or high-frequency traders–thus the interest.
"Normally, when the SEC is trying to implement rules and regulations, they are often extensive, expensive or disruptive," Bartlett said. "But in this case, they have a good idea that can be implemented in the existing regulatory framework without any undue burden."
The proposed rule is actually an amendment to a rule that has been on the books for 20 years. In 1990, the SEC, reacting to the market crash of 1987 and accusations against futures traders, won congressional approval to augment the Securities Exchange Act of 1934 with Section 13(h). The regulator tried in 1991 and 1994 to push through a rule, but gave up in the face of industry resistance.
Now, with the pressure on from Congress to "do something" about high-frequency traders, the SEC is trying again. This rule would simply aid the SEC in understanding the HFT phenomenon at a time where there is little actual data covering their activities.
The rule does not specifically target high-frequency trading firms. It targets entities with "investment discretion over one or more accounts" trading through registered broker-dealers. That definition is meant to rope in investment advisers, proprietary trading houses and broker-dealer prop desks.
And although the rule is ostensibly aimed at high-frequency traders, the SEC decided not to define "large traders" by the frequency of their trading but by the quantity. The SEC defined a large trader broadly as either a firm or individual whose trades in exchange-listed securities equal or exceed 2 million shares or $20 million in a day, or 20 million shares or $200 million during any month, whichever is greater.
At 2 million shares per day, the SEC is targeting those shops doing one-hundredth of a percent of average volume. That is expected to include about 400 firms.
If passed, the rule would fall under Section 13 of the Securities Exchange Act of 1934. The large trader must provide information that would allow the SEC to identify the trader and all his trading accounts.
Large traders must give their LTID numbers to each broker-dealer they trade through, to enable the broker-dealers to keep records. The LTID would be used for all accounts over which the large trader directly or indirectly controls or exercises investment discretion.
Manoj Narang, chief executive and strategist at Tradeworx, said that despite the increased paperwork the large-trader rule would bring, it won’t negatively impact his trading business.
"I agree that the large-trader rule could take pressure off high-frequency firms, which I feel exists for no good reason," Narang said. "This proposal doesn’t have any far-reaching consequences in terms of equity market structure. Therefore, it’s a perfectly fine maneuver for the SEC to do."
Read the response to Large Trader by Tradebot Systems’ Dave Cummings
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