High-frequency traders: a review of the challenges in registering them as dealers

Abstract

Purpose

To describe some of the challenges that the Securities and Exchange Commission (SEC) will face in requiring that high-frequency traders register as dealers.

Design/methodology/approach

This paper provides a brief overview of the dealer-trader distinction, an analytical framework under which some high-frequency traders have avoided registration with the SEC as dealers. It then explains the difficulties the SEC will encounter in bringing high-frequency traders within its regulatory umbrella as dealers. In particular, the paper outlines some of the interpretive challenges the SEC encounter as well as challenges to justifying the economics of any proposal.

Findings

While the SEC has yet to formally propose rules in this area, the interpretive vehicle it uses could have repercussions for other market participants that rely on the dealer-trader distinction to avoid having to register as dealers with the SEC.

Originality/value

The paper provides practical insights into the issues the SEC will have to address if it proposes to bring high-frequency traders within its regulatory umbrella as dealers. In addition, it provides a concise overview of the dealer-trader distinction based on statements by the SEC and its staff.

Citation

Fitterman, M. and Sandoval, I. (2014), "High-frequency traders: a review of the challenges in registering them as dealers", Journal of Investment Compliance, Vol. 15 No. 3, pp. 3-9. https://doi.org/10.1108/JOIC-08-2014-0035