UPDATE 2-U.S. SEC eyes volatility in high-frequency trading

Mon Oct 26, 2009 10:21pm GMT

 * Congress to probe high-frequency trading Wednesday
 * Discussion paper expected by December at the earliest
(Adds details on SEC actions, concept release)
 By Jonathan Spicer and Rachelle Younglai
 NEW YORK/WASHINGTON, Oct 26 (Reuters) - U.S. regulators
looking into high-frequency trading have asked the industry if
institutions are flocking to so-called dark pools and
increasing market volatility, sources familiar with the SEC's
line of questioning said on Monday.
 The Securities and Exchange Commission is not expected to
release a discussion paper on high-frequency trading and other
market developments being scrutinized by some lawmakers at
least until December, the sources said.
 High-frequency trading now accounts for an estimated 50
percent to 70 percent of all U.S. equity trading and is growing
fast in other regions and asset classes. In it, banks, hedge
funds, and independent shops use ultra-quick algorithms to make
markets and capitalize on tiny spreads and market imbalances.
 Some politicians and investors have raised concerns the
practice, which effectively replaced traditional market-makers
over the last decade, creates a two-tiered market favoring the
most sophisticated players.
 On Wednesday, a congressional panel will examine high-
frequency trading and other recent market developments such as
so-called dark pools, or anonymous trading venues where quotes
are not displayed publicly
 The SEC has said it wants to issue the discussion paper, in
which it will ask questions about whether the rules have kept
up with the current market structure to better understand the
impact of high-frequency trading, which remained one of the
most profitable lines of business throughout the financial
crisis.
 The discussion paper or so-called concept release can be a
precursor to rule making and will be open for public comment.
 One source said SEC staff have spoken first-hand to some
high-frequency shops about volatility and how buyside firms are
reacting to faster markets, adding that the staff is still in
gathering information.
 A second source said the regulator was also asking whether
the shift to dark pools was increasing volatility in the public
markets.
 The SEC has already proposed ways to shed light on the dark
pools and has proposed banning so-called flash orders, which
give advance knowledge of stock orders to certain traders.
 (Reporting by Jonathan Spicer in New York and Rachelle
Younglai in Washington; editing by Matthew Lewis and Andre
Grenon)