SEC Rejects “Kill Switch” Regulation for High-Frequency Trading

The U.S. Securities and Exchange Commission (SEC) has raised concerns about a “kill switch” approach to regulating high-frequency trading (HFT) platforms.

“We are realizing the one-size-fits-all rule is questionable,” said Gergg Berman, the SEC’s trading and markets senior advisor to the director.

High-frequency trading (HFT), which uses algorithmically-charged software to post trades in nanoseconds, has been blamed for several failures in global trading over the last year. One high-profile case saw U.S. broker Knight Capital Group lose more than $400 million in only 45 minutes. This “flash crash” occurred when a bug generated thousands of erroneous stock orders.

According to Berman, much of the conversation about HFT has so far centered on major events, like the infamous flash crashes that rocked markets earlier this year. Given the massive dollar amounts lost in mere moments, it’s not surprising that regulators would single out these large market events at the expense of the everyday problems engendered by HFT.

“This [kill switch] is not going to address the little blips that come up,” Berman said.

It may not be a coincidence that the SEC’s updated opinion on HFT comes on the heels of an academic report that suggests HFT might actually help stabilize markets.

In a report titled “The diversity of high frequency traders” and published by Björn Hagströmer Lars Nordén of Stockholm University, HFT is recognized as a boon to market makers.

“Our results indicate that, as a group, the opportunistic HFTs contribute to market quality,” the report says.

Read more here. And here.

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