High-Frequency Traders: How the SEC Can Tighten Regulation While Maintaining the Benefits of a Competitive Market

In 2010, the so-called “Flash Crash” of the U.S. stock market brought the overlooked practice of high-frequency trading into the spotlight for the first time. Initial efforts to study and curtail the practice, including a transaction fee pilot attempted by the Securities and Exchange Commission in 2018, have been unsuccessful. After outlining the substantial benefits market participants gain from the activities of high-frequency traders, this article argues that there are three potent and readily available tools for limiting the harmful excesses of those traders: (i) aggressively bring market manipulation charges under § 9(a)(2) of the Exchange Act against those who attempt to manipulate the market; (ii) to bring enforcement actions under § 78f(b)(5) of the Exchange Act against national exchanges that fail to “protect investors and the public interest” by giving special benefits to those traders; and (iii) utilize § 19 of the Exchange Act to oversee exchange colocation rules designed to benefit those traders which do not reflect fair access and transparency. With these proposals implemented, markets will continue to function at historically low costs for all investors with the aid of healthy competition between high-frequency traders.