Technology has revolutionized equity markets and regulators are struggling to keep pace. That may soon change, due to a series of pending reforms announced by Securities and Exchange Commission Chairman Mary Jo White during a speech before financial industry professionals in New York City on Tuesday. She provided the most comprehensive overview to date on how she plans to tackle such controversial topics as high-frequency trading and the private trading venues known as “dark pools.”

Regarding high-frequency trading, White said the SEC should not “roll back the technology clock” or prohibit algorithmic trading. Instead it will assess the extent to which computer-driven trading may work against investors, rather than for them. An area of concern is that instability arising during a broad market event may “simultaneously affect hundreds or thousands of stocks, triggering many trading pauses and re-openings over a short period of time.”

White has directed SEC staff to develop recommendations for an anti-disruptive trading rule. In time, Commissioners will consider: a rule to clarify the status of unregistered active proprietary traders to subject them to existing rules as dealers; and a rule eliminating an exception from membership in the Financial Industry Regulatory Authority, a self-regulatory organization, for dealers that trade in off-exchange venues. “Dealer registration and FINRA membership should significantly strengthen regulatory oversight over active proprietary trading firms and the strategies they use,” she said.

White said there will also be a forthcoming focus on ways to improve firms' risk management of trading algorithms and to enhance regulatory oversight over their use. “Given the overwhelming dominance of trading algorithms, it is time that our regulatory regime is updated to take better account of the risks when they are poorly designed or operated,” she said. There will also be a review of whether high-speed proprietary trading detracts from the interests of average investors. A possible outcome is that the national stock exchanges and FINRA may adopt SEC recommendations to include a time stamp in consolidated data feeds that indicates when a trading venue processed the display of an order or execution of a trade. Another request to the exchanges is to develop rule changes for disclosing how—and for what purpose—they are using data feeds.  Another idea under consideration: affirmative or negative trading obligations for high-frequency trading firms.

“We must consider whether the increasingly expensive search for speed has passed the point of diminishing returns,” White said. “I am personally wary of prescriptive regulation that attempts to identify an optimal trading speed, but I am receptive to more flexible, competitive solutions that could be adopted by trading venues.”

White flagged fragmentation as another market structure concern. Order flow in exchange-listed equities is divided among many trading venues—11 exchanges, more than 40 alternative trading systems, and more than 250 broker-dealers. The competition for order flow benefits investors by, ideally, keeping trading fees low.  Having multiple trading venues can also help avoid trading disruptions, because if one venue has an isolated problem order flow can be immediately shifted to other venues.

The proliferation of venues, however, also creates problems, she explained. Their interconnectedness creates the potential for one or more systems to malfunction and disrupt other systems. Another concern is the increase in the percentage of order flow handled and executed by private, dark trading venues. Although the trades of dark venues are reported in real time, the identity of participants is not disclosed to the public.

“Transparency has long been a hallmark of the U.S. securities markets, and I am concerned by the lack of it in these dark venues,” White said, adding that she supports an expansion of the SEC's trading volume disclosure regime to off-exchange market makers and other broker-dealers. This would require more information about these operations to be disclosed to the SEC and, in turn, the public.

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