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Rules & Regulations

High-Speed Traders Fear SEC's 'Tick Pilot' Test

October 3, 2016

Some of the biggest electronic traders – Citadel Securities, KCG Holdings – are complaining that the SEC’s new 2-year “tick-size pilot” test will expose their top-secret strategies.  While the program is designed to whip up more trading in small, they argue it will also force them to publicly expose detailed trading data with only the thinnest veil of anonymity, thus allowing competitors to reverse engineer how their prized trading algorithms work.


For high-speed trading firms, complex computer code is the secret weapon for profiting from the market. Some brokers say they fear that in their test, regulators won’t sufficiently mask their publicly reported trading data.  As a result, firms like Citadel say they're likely to “change their behavior to protect their intellectual property,” thus making the test’s results less meaningful.


Tick Pilot.   The program will widen the minimum price move for about 1,200 small companies to 5¢ from 1¢ - which hopefully will boost profits for market makers, luring volume by enticing more intermediaries to trade those small stocks.


The plan, approved last year, requires traders to report data on how they handle stocks involved in the program, to help gauge the test’s success.  Regulators will publicly report monthly data on trading of tick pilot stocks. Though the data will be reported anonymously, some broker-dealers argue it will be easy for a shrewd competitor to identify which firm’s data is which, providing a window into their strategies.