NEW YORK, June 30 Last month's "flash crash" was a wake-up call for regulators to strengthen rules for those firms that provide liquidity to the marketplace, Getco LLC, a big U.S.-based market maker and high-frequency trading firm, said in a commentary published on Wednesday.
Getco is perhaps the most familiar name in the relatively quiet world of high-frequency trading -- the lightning-quick trading practice that has come under increased scrutiny over the last year and has been blamed in part for worsening the May 6 market plunge.
These traders use computer algorithms to make markets and take advantage of tiny imbalances, and are involved in an estimated 60 percent of U.S. stock trading volume, providing much liquidity. While some of the big firms stopped trading during the flash crash, Getco has said it continued to trade.
The Chicago-based company's co-founders, in a column on the Financial Times website, said regulators "must address the role market makers should play in equity markets," adding that obligations for these firms need to be balanced with benefits to reflect the risks they take.
Market makers typically use their own capital to take both sides of the market, essentially buying and selling without taking long-term bets so that investors can easily trade.
Getco this year became an official market maker for some NYSE-listed stocks. "As one of the largest market makers, we support stronger rules for liquidity provision," the company's Stephen Schuler and Daniel Tierney said in the column.
"To qualify as a market maker, companies should meet four criteria: provide useful liquidity; provide relevant prices; risk their own capital; and meet higher capital requirements based on their quoting obligations," they added.
The U.S. Securities and Exchange Commission raised the prospect of trading obligations in a January paper outlining its concerns about market structure and high-frequency trading.
Shortly after the flash crash, U.S. exchange executives told the SEC these firms help keep markets functioning. A Nasdaq OMX Group Inc (NDAQ.O) executive suggested at the time regulators should consider "creating better incentives to provide liquidity during periods of market stress." [ID:nN20123345]
The crash drove the Dow Jones industrial average down some 700 points in minutes, rattling investors globally and sparking a handful of new rule proposals but few clear answers as to its cause. (Reporting by Jonathan Spicer)