SEC Weighs Proposal To Tag High-Frequency Trades

U.S. regulators are moving toward a new rule that would tag transactions by high-frequency trading firms to improve oversight of their burgeoning activity, according to people familiar with the matter.

The plan would see the Securities and Exchange Commission give high-frequency firms unique identifiers, allowing the agency to keep closer tabs on traders that are not registered market-makers or broker-dealers.

The SEC and other global regulators are intensifying scrutiny of computer-driven trading, which has expanded rapidly and is estimated to account for two-thirds of daily U.S. stock volume. It is also a key source of liquidity for listed derivatives markets.

The agency is undertaking a cost-benefit analysis on tagging to high-frequency firms' trades, and is expected to move forward with a proposal in the near future, according to several people familiar with the process.

The move would make it simpler for regulators to track their activity, avoiding the need to follow lengthy audit trails from exchanges.

"The SEC can get any data they want, period, but right now it's kind of cumbersome because they have to go through the clearing firm," said one securities lawyer who had discussed the matter with SEC officials. "This would make it more automated."

High-frequency trading is a catch-all term that incorporates business from large broker-dealers and smaller proprietary firms. It isn't clear which traders and transactions would fall under the SEC tracking scheme.

However, the tagged trading data released a day after transactions were executed, would be available only to regulators, according to persons familiar with the matter.

While smaller firms or participants may resist such a rule amid fears their strategies could be revealed, most of the largest high-speed trading firms already report much of their activity through various channels and would see little reason to object, market participants said.

"My personal opinion is that it's a reasonable thing to do, at some level," said a senior official at one proprietary trading shop.

The broad push by regulators to improve market transparency and reduce systemic risk includes an array of changes to transaction reporting.

The SEC is considering a raft of new rules aimed at the rapidly changing makeup of U.S. securities and options markets, now dominated by electronic trading and dispersed across a range of exchanges and other trading venues.

The agency is eyeing reporting requirements that would provide more transparency into the trading on so-called dark pools, private electronic platforms where large blocks of stock are traded anonymously.

The SEC also has proposed to ban "naked access" for high-speed traders, which allows firms to buy and sell stocks on exchanges using a broker's computer code without authorities knowing who is making the trades.

A move to track the activity of fast-moving market participants has been expected following calls by Sen. Ted Kaufman, a vocal critic of high-frequency trading, for the SEC to take a closer look at the practice in U.S. markets.

-By Jacob Bunge, Dow Jones Newswires; (312) 750 4117; jacob.bunge@dowjones.com

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