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SEC dials up oversight of high-frequency traders with new dealer rule

BY: DECLAN HARTY | 02/06/2024 10:01 AM EST | UPDATED 02/06/2024 12:56 PM EST

Wall Street’s fastest trading shops will need to register with the SEC as dealers under a new rule finalized Tuesday, opening them up to tougher scrutiny.

High-frequency trading firms have emerged over the last two decades as a leading force in financial markets, including by acting as conduits for the easy trading of securities. Now, the SEC wants a broad swath of those firms, some private funds and others to come under the agency’s direct oversight, putting them on par with other financial institutions.

“Despite these firms acting as de facto market makers and despite their regularity of participation consistent with buying and selling securities or government securities as part of a regular business, a number of these firms have not registered with the commission as dealers,” SEC Chair Gary Gensler said. “This deprives investors and the markets themselves of important protections — protections that benefit market integrity, resiliency, transparency and more.”

SEC officials told reporters that the agency’s new so-called dealer definitions are aimed at ensuring resiliency, stability and investor protection in the securities market — including the critical $26 trillion U.S. Treasury market. Nearly four dozen firms are expected to be pulled into the SEC’s regulatory umbrella under the new rule, they said.

Gensler, who called the changes “common sense,” voted in favor of the final rule alongside the SEC’s other two Democratic commissioners, Caroline Crenshaw and Jaime Lizárraga. Republican Commissioners Hester Peirce and Mark Uyeda blasted the rule and warned of its potential reach.

“The public should be concerned about the immense scope of this claimed jurisdiction,” Uyeda said in a statement. “The rule of law means that the government should define ex-ante which activities are lawful and which are not. Without such definition, governmental authority can be arbitrary and even tyrannical.”

The SEC’s rule has been the subject of widespread concern on Wall Street over much of the last two years, as money managers, insurers and others have fretted about being included. Their concerns largely revolved around the proposal’s quantitative standard, which was axed in the SEC’s final rule, among other changes. An SEC official said the rule was tweaked in part to narrow its reach.

MFA President and CEO Bryan Corbett, whose hedge fund group had been a leading critic of the proposal, said in a statement that the final rule “is a significant improvement” over the initial plan. But there are still questions about its scope.

“Alternative asset managers are not dealers, and MFA is concerned that the Rule may not go far enough in excluding them and private funds from being regulated as dealers,” Corbett said.

Under the final rule, the SEC’s definitions for a “dealer” and a “government securities dealer” are instead based on certain activities such as whether a firm is regularly signaling to the market an interest in buying and selling a security around the best price available.

The new rule will also apply to entities that primarily earn revenue by capturing the price differences between buying and selling securities or from trading venues and exchanges.

But the SEC added that just because a firm does not engage in the practices highlighted in the rule does not mean it’s not a dealer.

Firms will need to begin complying with the rules roughly 14 months after they publish in the Federal Register, according to the agency.

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