House Votes to Require SEC Subpoena for Traders' Source Code

(Bloomberg) -- The House voted Wednesday to ensure the U.S. Securities and Exchange Commission would continue to have to seek a subpoena before accessing proprietary source code from high-frequency traders, the secret sauce that fuels profits.

The bill, passed 271-145, applies to proprietary trading algorithms from broker-dealers, hedge funds, and other SEC-regulated entities. The Senate hasn’t scheduled a vote on the legislation.

Supporters say the bill, H.R. 3978, would protect intellectual property of high-frequency traders and funds. Jeb Hensarling, a Texas Republican and chairman of the House Financial Services Committee, said on the floor that source codes are "the crown jewels" of electronic trading firms and transferring them to the government would expose companies to "obvious dangers" of cybersecurity risks.

Opponents, including Democrat Maxine Waters of California, said the measure would allow hedge funds and high-frequency traders to avoid regulatory oversight. Waters, the top Democrat on the House Financial Services Committee, said it would undermine the SEC’s ability to respond quickly in the event of a sudden market drop.

The bill comes after the Commodity Futures Trading Commission proposed in December 2015 allowing staffers or the Justice Department to inspect source code. After facing objections, the CFTC amended the rule with a requirement for subpoena or approval by CFTC commissioners. The measure wasn’t adopted.

--With assistance from Ben Bain

To contact the reporter on this story: Yueqi Yang in New York at yyang492@bloomberg.net.

To contact the editors responsible for this story: Joe Sobczyk at jsobczyk@bloomberg.net, Justin Blum, Laurie Asséo

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