Ted Kaufman - United States Senator for Delaware

US Reps Caution SEC On 'High Frequency' Traders

Source: Wall Street Journal

By Jessica Holzer and Jacob Bunge

September 1, 2010

A top U.S. House Republican warned the Securities and Exchange Commission not to respond to "political pressure" and blame high-frequency trading firms for the May 6 market crash.

Rep. Spencer Bachus (R., Ala.) also questioned the basis for some of the SEC's recent proposals for revamping equity market rules, terming the agency's approach "ad hoc."

"Changes in equity market structure did not occur overnight and the SEC's response to these changes should be based on economic and empirical market data, not political pressure," Bachus, who is the top Republican on the House Financial Services Committee, wrote in an Aug. 24 letter to SEC Chairman Mary Schapiro.

Rep. Jeb Hensarling (R., Texas) also signed onto the letter.

There is growing pressure on regulators to tighten oversight of high-speed proprietary trading firms, whose crucial role as liquidity providers was underscored after some of the biggest firms exited from the equity markets May 6, potentially exacerbating the volatility. Such firms are estimated to account for two-thirds of all trades in the U.S. stock market each day.

Bachus's letter follows two separate missives to the SEC from Senate Democrats regarding high-speed traders.

Sen. Edward KAUFMAN (D., Del.) in an Aug. 5 letter called for the SEC to register major high-frequency trading firms. Meanwhile, Sen. Charles Schumer (D., N.Y.) wrote in an Aug. 11 letter that major trading firms should be legally bound to provide liquidity to U.S. equity markets.

Bachus has received donations from trading firms Getco LLC and Knight Capital Group Inc. (KCG), according to the website OpenSecrets.org. Meanwhile, Hensarling received $2,000 from Knight Capital.

The lawmaker demanded responses to 15 questions touching on recent moves by the SEC, including a proposed ban on the "flash orders" that some say allow certain traders an unfair peek at market activity.

"If one of the commission's mandates is to promote competition, how will investors benefit from eliminating the ability of broker-dealers, exchanges, and trading systems to compete for order flow by banning execution methods?" he wrote.

The SEC proposed to ban flash orders last year after Schumer and other lawmakers had pushed for a halt in the order type. The move left the impression with some that the agency was bowing to political pressure. Bachus, in his letter, asked the SEC to provide the economic analysis underpinning the decision.

The SEC is facing a mammoth workload in the wake of the financial crisis. It has been given the task of more studies and rules from the sprawling Dodd-Frank financial bill than any other federal agency. Meanwhile, it is racing to implement changes aimed at preventing another "flash crash." An SEC report on the causes of the May 6 crash is due next month.

Bachus said the SEC, despite its heavy workload, should finish rules to prevent faulty trades from causing wild stock-price swings. "These rules are important to provide uniformity in times of unusual or volatile activity in certain stocks," he said.

Bachus also questioned whether an SEC initiative to create a national system to track the trading of securities overlapped with a separate proposal to require new reporting from large traders, asking whether the SEC had examined the costs and burdens for companies implementing the two programs.

Print this Page E-mail this Page