Ted Kaufman - United States Senator for Delaware

Bachus, Hensarling Seek Hearing On SEC, CFTC Response to Flash Crash

Source: Bureau of National Affairs

By Malini Manickavasagam

September 10, 2010

Two Republican congressmen Sept. 9 asked House Financial Services Committee Chairman Barney Frank (D-Mass.) to convene a hearing with Securities and Exchange Commission Chairman Mary Schapiro and Commodity Futures Trading Commission Chairman Gary Gensler on their regulatory response, so far, to the May 6 flash crash.

In a letter to Frank, Reps. Spencer Bachus (R-Ala.), the committee's ranking member, and Jeb Hensarling (R-Texas), a senior member of the committee, complained that the regulators, particularly the SEC, are “moving forward … without having the empirical evidence needed to ensure that the diagnosis fits the disease.” A “ ‘shoot the computers first and ask questions later' ” approach will only undermine already weak investor confidence, they contended.

A week earlier, Bachus and Hensarling complained directly to Schapiro about what they see as her agency's premature response to the turbulence of May 6 (169 DER EE-12, 9/2/10). On that day, the Dow Jones Industrial Average plunged nearly 1,000 points in minutes and then rebounded. Specifically, Bachus and Hensarling told Schapiro that they are concerned about restrictions on high-frequency trading. The agency has considered action on this and related practices, but has yet to take any final action.

The Republicans' call for a hearing signals the growing political debate over high-frequency trading and whether it is more detrimental than beneficial. Their colleagues on the other side of aisle—notably Sens. Ted KAUFMAN (Del.) and Charles Schumer (N.Y.)—have urged Schapiro to impose restrictions if not bans. Indeed, two days before the Republicans' letter to Frank, Schumer wrote to Schapiro seeking a restriction to “slow down” high-frequency trading amid rising volatility. In a speech at the Economic Club of New York on Sept. 7, Schapiro conceded that any regulation of the practice—which involves the use of computer algorithms to execute large volumes of stock orders in milliseconds—should be balanced (172 DER EE-12, 9/8/10).

Bachus and Hensarling reminded Frank that the capital markets subcommittee questioned Schapiro and Gensler days after May 6 (93 DER EE-9, 5/17/10). Now that months have lapsed, a second hearing should be held to “examine the regulatory response … and its impact on the capital markets.”

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