FINRA Chief Wants SEC To Consider Separate HFT Licensing

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Everyone from the Securities and Exchange Commission to the FBI and the Department of Justice is investigating high frequency trading (HFT) these days to decide whether the tactics used harm the market, involve fraud, or otherwise need to be regulated, partially in response to new public awareness of the practice from Michael Lewis’ highly critical bestseller Flash Boys. At a recent speech at the Financial Industry Regulatory Authority (FINRA) annual conference, FINRA chief executive Richard Ketchum pushed for a small but significant change in current policy.

“I think it would be a great thing for the SEC to focus on whether there should be registration requirements for active high-frequency traders,” said Ketchum, report Suzanne Barlyn and Sarah N. Lynch for Reuters.

HFT usually passes through registered brokers, but oversight could be better

Ketchum said that a ‘signficant percentage’ high frequency trading (HFT) passes through a handful of broker-dealers who are already registered with FINRA, but the failure to monitor what those clients are actually doing is the source of many high frequency trading complaints. Ketchum also said that FINRA currently has nearly 170 open investigations into HFT.

The creation of a separate license for HFT probably wouldn’t change anything by itself. There are currently some unregistered high frequency traders that operate offshore, and forcing traders to register could persuade some firms to avoid questionable practices, but the main benefit would be in carving out a new legal status for high frequency trading.

Separate licensing will clarify what counts as HFT ahead of regulations

Throughout the debate over high frequency trading (HFT), there has been a lot of confusion between electronic trading, algorithmic trading, and HFT, and no one wants regulations meant to deal with high frequency trading to inadvertently roll back some of the lower transaction costs that electronic trading have made possible, for example. Creating clear distinctions now should make it easier to roll out new, targeted regulations in the future.

For its part, the SEC is actively studying what should be done about HFT (if anything). Some proposals include registration requirements, requiring that any rebates in the maker-taker system go to investors instead of brokers to eliminate the incentives to trade on some exchanges over others, and more transparent fee disclosure requirements, but nothing is certain yet.

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