SEC Wants Market Teamwork to Control Flash Traders

Saying the growing importance of technology and increased complexity are creating failure points in the financial services industry's infrastructure, SEC Mary Jo White called for increased collaboration among the sector's self-regulatory organizations (SROs).

"Systems are increasingly complex but, with today’s trading activity measured in microseconds, or even less, the margin for error is razor thin," White said last week at the SRO Outreach Conference in Washington, D.C. "Every failure makes news, failures invite criticism and, more importantly, failures shake investors’ confidence."

Although the term "self regulatory organization" may sound like a contradiction in terms, SROs fill an enforcement niche between industry participants and U.S. federal regulatory agencies.

SROs involved in the financial services industry include the Financial Industry Regulatory Authority (FINRA), the Municipal Securities Rulemaking Board (MSRB), the American Arbitration Association and others.

FINRA, the largest financial services SRO, was formed by a merger of the enforcement arms of the NYSE and NASD, and oversees the registration of financial services firms and brokers, among other roles.

With automated trading playing a larger role in the daily operations of exchanges, White said SROS and other market participants must work together to increase the stability of automated trading.

"Many of you are direct competitors of one another, and real-time collaboration among upwards of 20 SROs in response to a market event is challenging, to say the least," white said. Trying to build consensus or make progress on common areas of concern among this many SROs, even if you had the luxury of more time, is also daunting.

"Nevertheless, it is critical that SROs develop a collaborative approach, not only with similarly-situated SROs, but also across the landscape of SROs, so that, for example, exchanges and clearing agencies can work toward developing a holistic risk mitigation framework that uses the unique strengths of each to build a robust and resilient infrastructure that can help reduce the number of disruptions that occur in the first place."

Rule Filing Processes

White also praised the SROs' rule filing processes, which she described as critical to the SEC's oversight role of the SROs.

For instance, last week FINRA submitted a rule proposal calling for stricter background checks for new brokerage firm hires.

In her remarks, White called on the SROs to ensure proper resources are devoted to the rule filing process.

"It is important for you to keep in mind that in order for us to do our job effectively and expeditiously, we need your commitment to devote the necessary resources to produce high quality, clear, and complete rule filings," White said.