WRAPUP 1-US SEC eyes efficiency in high-frequency probe

* Regulator plans paper on high-frequency trading in 2010

* Eyeing market efficiency, small- and mid-cap stocks

* Who should be responsible for new "naked" access rules

* Considering whether rules should apply pre or post-trade

By Jonathan Spicer

NEW YORK, Nov 4 (Reuters) - The U.S. Securities and Exchange Commission is focused on whether high-frequency trading makes markets more or less efficient, and on how new "sponsored naked access" rules should be applied and monitored, SEC officials said on Wednesday.

The regulator is delving deep into the structure of increasingly automated equity markets, which have been criticized both for favoring the most sophisticated players and for posing dangers in the event of a computer malfunction.

The SEC plans to issue a discussion paper early next year on high-frequency trading -- where banks, hedge funds and proprietary firms use lightning-fast computer algorithms to make markets and profit from tiny spreads and imbalances.

A major crackdown on high-frequency traders is seen as unlikely, given that investors now rely on the liquidity they provide. But any new rules could impact prices, spreads and the way buy and sell orders circulate through capital markets.