The House passed a bill Wednesday that would require the Securities and Exchange Commission to obtain a subpoena in order to obtain algorithmic codes and related intellectual property from traders and hedge funds.
The bill, passed 271-145, requires the SEC to obtain a subpoena for proprietary trading algorithms from broker-dealers, hedge funds and other SEC-regulated entities. The Senate hasn’t scheduled a vote on the legislation.
GOP lawmakers said the bill “would ensure appropriate due process over highly sensitive proprietary algorithmic information and prevent the SEC from accessing certain intellectual property from a registered entity without a subpoena.”
Sponsors of the bill, including Rep. Jeb Hensarling (R-Texas), argued on the House floor that when the SEC takes proprietary algorithm codes back to the agency, it becomes one-stop shopping for hackers, While the SEC, in practice, obtains subpoenas for firm intel during investigations, the securities industry has lobbied to make the subpoena process explicit in law, in light of both the 2010 stock market crash, which many have argued was sparked by algorithmic trading, and the market correction earlier this month, which drained some $5 trillion from U.S. and global markets.
Rep. Maxine Waters (D-Calif.) led unsuccessful opposition to the bill on the House floor. “I’m particularly troubled this would make it easier for high-frequency traders to evade regulatory oversight. SEC oversight should be streamlined not hampered,” said Waters, who said it took the SEC five months to locate the one algorithmic trader who triggered the “flash crash” of 2010.
Consumer advocates have argued that the higher legal hurdle will slow down regulatory investigations during times of market duress, which may lead to even greater investor losses.
“Because this legislation would weaken SEC oversight of algorithmic trading and hamstring the agency from responding quickly to flash crashes or other market breakdowns, we oppose it,” Barbara Roper, Consumer Federation of America (CFA) director of investor protection, and Micah Hauptman, the CFA's financial services counsel, said in a letter the group sent to all House members.
The subpoena requirement would “have a devastating affect on the agency’s ability to respond quickly in the event of another flash crash or other such events in the future. In order to oversee the markets effectively, the SEC needs to be able to accurately and efficiently reconstruct order entry and trading activity, including for algorithmic traders,” the CFA officials said.
The subpoena requirement has been a priority of the securities industry since successfully lobbying to water down a Commodities Future Trading Commission (CFTC) rule in 2015. That rule would have required companies to hand over their propriety source code data at the request of a CFTC staffer. After industry push-back, the rule was changed to require the entire commission to approve requests to give staff access to source codes.
"The CFTC’s overreaching proposal raised concerns that other government agencies could follow their lead,” the House GOP Policy Committee said in an analysis of the bill.