New US SEC Rule to Target HFT Proprietary Trading Shops

The U.S. financial regulator is proposing a new rule requiring active broker-dealers trading off-exchange products to become members of a

U.S. Securities and Exchange Commission headquarters in Washington, D.C. (Photo: Bloomberg)
U.S. Securities and Exchange Commission Headquarters in Washington, D.C. (Photo: Bloomberg)

According to an announcement made by the U.S. Securities and Exchange Commission, the regulatory watchdog has proposed a new rule designed to target high-frequency trading prop shops.

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After seeking comments on the rule for 60 days, the SEC could mandate broker-dealers who are trading in off-exchange markets to become members of a national securities association. According to the announcement, the amendments will enhance the regulatory oversight of active proprietary trading firms with the explicit mention of high-frequency trading firms.

The Chair of the SEC, Mary Jo White, commented in the announcement, “This proposal embodies a simple but powerful principle of the federal securities laws – the protection of investors and the stability of our markets require that trading is overseen by both the Commission and a strong self-regulatory organization.”

“Today’s proposed rules would close a regulatory gap by extending oversight to a significant portion of off-exchange trading,” she explained.

The present rules include an exemption for certain broker-dealers from being members of one of the self-regulatory organizations under the national securities associations. The proposed revision would eliminate these loopholes and mandate brokers-dealers to file for membership with a national securities association.

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Currently, members of a national securities exchange who carry no customer accounts, and have an annual gross income of no more than $1,000 derived from securities transactions are excluded from the requirement.

An additional detail of the current framework states that income derived from proprietary trading conducted with or through another broker-dealer does not count against the $1,000 limit.

While the exemptions have been constructed to facilitate the operations of other entities such as exchange specialists and other floor members who may require the ability to do hedging on off-exchange markets, in the end it was the high-frequency trading shops that have also benefitted from the exemptions.

According to the proposed amendments, the current proprietary trading exemption will be replaced with a more focused one encompassing off-exchange transactions by a floor-based dealer solely for the purpose of hedging the risks of its floor-based activities, in order to retain the exemptions for the targeted operators.

They  will also update the exemption that permits off-exchange transactions necessary to comply with regulatory requirements restricting trade-throughs, under Rule 611 of Regulation NMS.

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