The debate over high-frequency trading and exchange traded funds (EFTs) has been raging for a while now, at least since the May 6, 2010 Flash Crash. But the exact process by which ETFs and high-frequency trading generate more volatility is still unclear, if it happens at all.

To its credit, the SEC and other regulators seem bent on taking a closer look. Finra, for example, has taken the unusual step of asking hedge funds for the code to some of their trading algorithms, while the SEC has asked more hedge funds for additional information about how their programs work, though they haven't often asked for the code itself, according to Reuters, which also notes that the SEC has beefed up its staff in this area.

At the same time the SEC is taking a look at ETFs with an eye on how they might feed market volatility. Leveraged ETFs are part of the probe apparently. While it's doubtful that these ETFs can have a systemic impact, there may be other, consumer-oriented issues, such as how these products are marketed.

In general, the relationship between index ETFs and high-frequency trading isn't well understood. This may be part of a general inquiry into this thorny area. Finra officials, however, tell Reuters that they are not on a fishing expedition. Rather, they have a specific issue in mind, though the issue has not yet been disclosed. In any case, the requests for source code and other information have some hedge funds a bit on edge.

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