Investing.com -- The Securities and Exchange Commission proposed a rule amendment on Wednesday that would require broker-dealers that trade in off-exchange markets to become members of a national securities association in a proposal that intends to provide greater regulatory oversight over firms that engage in so-called high frequency trading.
The proposed rule changes would provide the Financial Industry Regulatory Authority, also known as FINRA, with regulatory oversight authorization over high frequency trading firms, unless the firms limit their transactions to a specific exchange.
High frequency trading, a practice which received a great deal of publicity in author Michael Lewis' 2014 book Flash Boys, occurs when firms use powerful computers to process a significant volume of orders in a short amount of time. The computers use algorithms to evaluate market conditions and complete the high volume of orders at rapid speeds.
The proposed amendments on Wednesday affect rule 15b9-1, which currently excludes some broker-dealers from becoming members in a national securities association under a narrow set of exemptions. Before Wednesday's proposal, a section of the rule allowed some broker-dealers to take part in a considerable amount of off-exchange trading that was not properly regulated, according to the SEC.
"This proposal embodies a simple but powerful principle of the Federal Securities laws – the protection of investors and the stability our markets require," said SEC chair Mary Jo White in a statement.
Under SEC rules, the commission allows 60 days for public comment before it decides whether to adopt the amendment.
"This measure would significantly strengthen regulatory oversight over active proprietary trading firms and the strategies they use," White added.