The Quixotic Quest for Fairness: The SEC’s Role in the Rise of High Frequency Trading

Winner of the James Soltow Award for Best Paper in Essays 2015

Abstract

This paper examines the complex factors facilitating the rise of high frequency trading (HFT) from a historical perspective. Over the course of several decades, various stock market regulations and reforms, championed by the Securities and Exchange Commission (SEC), created room for HFT to develop and flourish. While advancements in technology initially may appear to be the primary cause of HFT, in fact, HFT could not exist (or at least, not to the extent it does today) if certain rules and older ways of doing business on the exchanges were still in place, and if other regulations did not support its existence. This paper identifies multiple factors contributing to the eventual rise of HFT: decimalization, the decline of the specialist system, market fragmentation, rate deregulation, the repeal of the uptick rule, demutualization of the stock exchanges, and the institution of Regulation National Market System [NMS]. Moreover, it seeks to position these developments within the broader context of long-standing aims and themes embraced by the SEC.