Understanding The Stock Market | The SEC’s Latest Proposals for Tagging High Frequency Trades

The SEC’s Latest Proposals for Tagging High Frequency Trades

In its continued battle to control and regulate the growing practice of high-frequency trading (HFT), the Securities and Exchange Commission (SEC) is proposing a new rule, whereby all high frequency trades are tagged with a special identifying code.

OF course, the tagging of trades is nothing new. Already, virtually every electronic trading protocol (including FIX, the standard increasingly being adopted for electronic trading messages) requires trades to be tagged with the originator, destination, customer code, date, time and so on and so forth. The SEC’s proposals would just require an additional field on the message to be tagged, stating that this is a high frequency trade.

By requiring firms to adhere to this rule, the SEC would be taking an important first step in the process of regulating high frequency algorithmic trading, that is in actually identifying high frequency trading activity, something they are currently unable to do with any kind of clarity.

The proposals have the full support of Senator Ted Kaufman (D -Del), who has been very outspoken recently in his calls for better high frequency trading regulation. Sen Kaufman would actually like the proposals to go further, making the identification details available to a wider community than just the regulators (e.g. academics and independent analysts, under the appropriate confidentiality agreements).

Sen Kaufman and others are concerned that market manipulation is occurring under the guise of some of the more opaque HFT practices and this is something he is very keen to put a stop to. In a recent interview, he said there was, in effect, zero regulation of high frequency trading and that situation needs to be addressed, sooner rather than later.

High Frequency Traders are understandably nervous about these proposals, especially if their trading data gets into the wrong hands. HFT is an incredibly competitive practice, and practitioners like to keep their cards close to their chests.

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