Ted Kaufman - United States Senator for Delaware

Kaufman Calls for “Deeper Review” of May 6 Market Crash

Senator points to long overdue need for meaningful and urgent review of market structure, high frequency trading

May 12, 2010

WASHINGTON, D.C. — In a Senate floor speech addressing the wild market swings of May 6, Senator Ted Kaufman (D-DE) on Wednesday raised numerous questions – many of which he has raised since last August in letters and Senate floor speeches – that the Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) must carefully answer.
 
In his Wednesday speech, Kaufman cited, among other issues that must be addressed with urgency: the need for a consolidated surveillance authority across all market centers; the SEC’s current inability to detect possible high-speed market manipulation; whether the SEC needs to impose market-wide pre-trade operational risk controls; whether high frequency trading is negatively affecting the IPO market; and whether certain electronic liquidity providers – which are currently unregulated but purport to act like market makers – should be required to maintain “fair and orderly markets.”
 
Kaufman first called on the SEC to undertake a comprehensive review of market structure issues on August 21, 2009.  Since then, he has raised questions about the lack of transparency into high frequency trading practices, the possibility of systemic risk, and the inability of regulators to detect and police against high-speed manipulation.  Kaufman especially has pushed the SEC to use its “large trader” reporting authority – granted by Congress to the SEC in 1990 – to “tag” high frequency traders and collect urgently needed data.
 
 “The [SEC] does not yet collect by rule the data it needs efficiently to reconstruct unusual market activity,” Kaufman noted in his Wednesday floor statement. “Even though Congress gave the SEC ‘large trader’ reporting authority in the Market Reform Act of 1990 – after the SEC had difficulty in reconstructing market incidents in 1987 and 1989 – the SEC never used it,” he added. “The SEC must move aggressively to finalize the large trader rule and insist on fast-track implementation by the industry.”

Kaufman continued: “The SEC must not solely look for quick fixes and surface solutions.  … Congress, consistent with its oversight responsibilities, must direct regulators to study and report, in a timely manner, on what needs to be done to prevent another meltdown of this magnitude.  It is entirely appropriate for Congress to elaborate on the needed elements of a meaningful review.”
 
To restore the credibility of our markets, Kaufman said in closing on Wednesday, “democracy must work in a way that permits timely reform of our most powerful financial institutions. And Wall Street must recognize its own long-term interests – preserving the credibility of our markets – are vitally at stake.”
 
In a speech on September 14, 2009, Kaufman predicted some of the events of last Thursday:  “[U]nlike specialists and traditional market-makers that are regulated, some of these new high-frequency traders are unregulated, though they are acting in a market-maker capacity,” he said. “If we experience another shock to the financial system, will this new, and dominant, type of pseudo market maker act in the interest of the markets when we really need them?  Will they step up and maintain a two-sided market, or will they simply shut off the machines and walk away? Even worse, will they seek even further profit and exacerbate the downside?”

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