(Bloomberg) U.S. Securities and Exchange Commission Chairman Mary Schapiro said her agency may impose new rules on high-frequency traders after lawmakers and investors questioned whether market participants who execute thousands of transactions in seconds sparked the May 6 plunge.
The SEC should consider whether traders with the "best access" to markets should face obligations to buy and sell stocks to preserve liquidity, Schapiro said today in remarks prepared for a speech at the Economic Club of New York. The agency is also examining whether stock quotations should have to stand for a minimum amount of time. Such a change would stop high-frequency traders from repeatedly placing and canceling orders in milliseconds.
"Some could argue that May 6 was an aberration-another perfect storm-and now that it has passed markets have naturally adapted leaving no need for a comprehensive review of our market structure," Schapiro said. "I disagree."
Regulators are under pressure to show they have a grip on markets increasingly dominated by electronic trading after the May 6 selloff erased $862 billion from the value of U.S. equities in less than 20 minutes. A preliminary report published by the SEC and the Commodity Futures Trading Commission in May found liquidity dried up when it was needed most.
Lawmakers such as U.S. Senator Charles Schumer, a New York Democrat, have argued that high-frequency traders pulled out because they face no obligation as market makers to buy and sell shares during periods of market stress.
"In the old manual market structure, the market participants with the best access to the markets-the specialists and the dominant exchanges-were subject to significant trading obligations," Schapiro said. "These traditional obligations have fallen by the wayside."
The SEC is investigating whether the rapid-fire submission of stock orders that are then canceled represents an effort to manipulate markets, Schapiro said. Many high-frequency traders cancel at least 90% of their orders, she said.
One step to address the surge in canceled orders would be requiring a "minimum time in force for quotations," Schapiro said.
"There may, of course, be justifiable explanations for many canceled orders to reflect changing market conditions," she said.
The SEC has already taken steps to address the May 6 crash, including halts on trading of stocks with price moves of at least 10 percent in five minutes. The agency may also eliminate so-called stub quotes, which are prices far from current trading values. Stub quotes exist to fulfill an obligation some brokers have to buy and sell stock. When they were triggered on May 6, some stocks traded for pennies.