New HFT Oversight Viewed as Hollow Victory for U.S. Regulators Traders Magazine Online News, March 30, 2015 Dave Michaels and Sam Mamudi (Bloomberg) -- The U.S. Securities and Exchange Commission took its first shot last Wednesday at boosting regulation of high- speed traders. The industry says it dodged a blow. The SEC’s proposal, approved last Wednesday by the five-member commission, will force some high-frequency traders to become members of the Financial Industry Regulatory Authority, which oversees brokerage firms’ practices. Affected companies include Virtu Financial Inc. and Tradebot Systems Inc., according to a person familiar with the matter. The firms, however, are already effectively scrutinized by Finra because they’re members of exchanges such as the New York Stock Exchange and the Nasdaq Stock Market that outsource much of their regulatory duties to the organization, said Adam Nunes, head of business development at Hudson River Trading, a high- frequency trading firm. Finra examiners, for example, already visit the firms and inspect trading logs. “This sounds good, but little is changing with respect to our regulatory interactions,” Nunes said. “Finra already performs this function on behalf of most exchanges.” Virtu and Tradebot declined to comment. SEC Chair Mary Jo White has described the proposal as an important step in strengthening the SEC’s oversight of proprietary firms, which trade for their own accounts and don’t handle client orders. White said Wednesday the proposal will “close a regulatory gap by extending oversight to a significant portion of off-exchange trading.” 125 Firms Many of the leading high-frequency trading firms belong to Nasdaq or the NYSE, so they must record all of the trade data that Finra requires and provide it upon request, according to Finra’s rules. The estimated 125 firms that would fall under the requirement are also registered with the SEC, according to the regulator. “The truth of the matter is, Finra is still able to send these firms requests and get information, or they can go to the exchange and have the exchange get the information,” said Christopher Nagy, chief executive officer of Kor Group LLC, a lobbyist and consultant on market regulation. “The notion they are completely exempt from regulation is wrong.” Finra has taken its own steps to close any blind spot, proposing a rule in November that would require brokers to disclose the names of any proprietary traders whose orders they handle. The proposal is the first sign of progress from the SEC since White announced in June that the agency would develop new rules for high-frequency traders, dark pools and stock exchanges. In her speech at the time, White outlined an ambitious agenda that included reviewing whether stock exchanges, as for-profit companies, should continue to regulate their own members. ‘Significantly Strengthen’ If approved, the plan passed yesterday by the SEC would formally close a loophole in the SEC’s rules that have allowed proprietary trading firms to avoid membership in Finra, a self- regulatory organization that earned $414 million in regulatory fees in 2013. The public has 60 days to comment on the SEC’s plan, and the agency must study any feedback before it votes on a final regulation. In a statement, Finra said it agrees with White that requiring the firms to report directly to Finra “should significantly strengthen regulatory oversight over active proprietary trading firms and the strategies they use.