Ted Kaufman - United States Senator for Delaware

Sen. Kaufman Calls On SEC To Register High-Frequency Traders

Source: Dow Jones Newswire

By Jacob Bunge

August 17, 2010

Sen. Edward KAUFMAN (D., Del.) said that major high-frequency trading firms should be required to register with Securities and Exchange Commission to ensure stricter oversight of the business.

In addition, regulators should consider requiring chief executives of computer-driven trading firms to certify under oath that their algorithms do not manipulate prices in U.S. stock and derivative markets, according to KAUFMAN.

"In the aftermath of the flash crash, this is an historic moment for the Commission, a moment when it must fulfill its obligation as steward for those investors who lack the clout of Wall Street's largest financial players," the senator wrote in an Aug. 5 letter to Mary Schapiro, chairman of the SEC.

KAUFMAN's letter to Schapiro came as the SEC and the Commodity Futures Trading Commission prepare to issue in early September a final report on the market events of May 6, when the Dow Jones Industrial Average dropped by nearly 1,000 points before swiftly recovering.

KAUFMAN's recommendations followed a call last week by Sen. Charles Schumer ( D., N.Y.) to tighten up regulatory requirements for high-speed proprietary trading groups that make markets in the U.S.

By some measures, such firms represent about two-thirds of all trades in the U.S. stock market each day, pursuing a range of market-making and arbitrage strategies.

Executives of professional trading firms argue that by standing ready to take the other side of investors' trades in a split second, they help keep trading costs low for everyone and make the market more efficient.

Critics allege that the firms' sheer speed and unknown power to move markets allows them to take advantage of slower-moving participants like mutual funds and retail investors.

KAUFMAN, appointed in 2008 to fill out the Senate term of Vice President Joe Biden, laid out in his letter a wide-ranging list of recommendations that he said would make markets more stable and curb manipulation.

While some high-frequency trading firms are registered as broker-dealers and others are hedge funds, a requirement to register with the SEC would ensure no firms elude regulators' watch.

He urged the SEC to quickly finalize a proposal to ban "flash" order types, which give some exchange participants the chance to act on an unfilled order before it's sent to another market for filling.

KAUFMAN also sought faster resolution to proposals aimed at identifying the activity of major trading firms and tightening rules around off-exchange trading, saying he was "disappointed" in the sometimes lengthy time scale for putting rules into effect.

Furthermore, U.S. investors are afflicted with an overabundance of trading venues, with dozens of private electronic markets operating alongside full- fledged exchanges, KAUFMAN wrote.

He called on regulators to raise requirements for introducing a new trading platform to reduce the "fragmentation" of the U.S. market, which has been tagged as a key factor in the May 6 market volatility.

In addition, rules are needed to cut down on trade cancellation messages that have the potential to "choke" electronic systems, he wrote.

KAUFMAN said the SEC--not exchanges--need to make and enforce such rules because market operators are "conflicted due to their dependence on high- frequency trading volume for market share and market data revenue."

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