Given the choice between battling criminal investigators or answering to an experienced regulator who disputes claims the stock market is broken, it’s no surprise who traders are cozying up to.

U.S. Securities and Exchange Commission Chairman Mary Jo White yesterday disclosed plans to bolster oversight of high-frequency traders and examine secretive private platforms known as dark pools. The announcement came almost two months after Bloomberg News reported that New York Attorney General Eric T. Schneiderman subpoenaed six firms as part of his probe into automated trading.

While Schneiderman’s inquiry was greeted coolly by industry executives, praise for White and the SEC was almost effusive yesterday from exchanges and high-frequency firms. White said the $23 trillion U.S. stock market isn’t broken, an assessment that sits well with an industry portrayed as out of control in Michael Lewis’s book “Flash Boys.”

“I don’t know what else she could say,” said Sang Lee, managing partner at Aite Group LLC. “It’s an extremely difficult position. You are a regulator, but you also don’t want to squash innovation in the marketplace. One can argue HFT is an innovation. But is it an innovation that’s gone too far?”

The SEC plan would subject the private networks known as dark pools to more review, register proprietary firms that engage in high-frequency trading and explore whether prices are disseminated fairly to investors.
Schneiderman said on April 4 that new laws may be needed to safeguard markets. Yesterday, he said on Twitter that he’s “pleased to see” White’s comments “calling for market reforms to curb unfair advantages for HFT.”

At the SEC, speed traders have faced less withering criticism from White and Gregg Berman, who oversees the agency’s office of analytics. Berman said in an April speech in New York that the debate around market structure had become “too narrowly focused and myopic” and that both sides deserved to be heard. The SEC is aiming to bring more transparency to markets and address claims of unfair advantages held by traders that account for about half of U.S. stock executions and have been blamed for everything from the flash crash of May 2010 to market volatility during the European debt crisis.

Among proposals under review is a rule that would require more oversight by traders of their algorithms, White said. While White said she was wary of setting speed limits on traders, the SEC will consider options for minimizing the speed advantage that some have.

There’s common ground between White and Schneiderman, who has questioned whether the opaqueness of dark pools does harm to the market. White echoed that concern yesterday. The SEC plans to cooperate with stock exchanges to address claims of unfairness in how order and price data reach the public.
— Sam Mamudi and Nick Baker

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