Ted Kaufman - United States Senator for Delaware

Kaufman Says High Frequency Data Should Not Sit Unused

SEC should be an active regulator examining high frequency trading

April 14, 2010

WASHINGTON, DC. — Sen. Ted Kaufman (D-Del.) released the following statement today after the five Securities and Exchange Commissioners voted unanimously to adopt a proposed rule that should help regulators gain a better understanding of the complex and largely-opaque high frequency trading strategies that now dominate the equities markets:
 
“Today’s vote marks an important step to ensuring the Commission has the data it needs to analyze and understand high frequency trading strategies and detect any market abuses that illegally disadvantage long-term investors. ‘Large trader’ reporting, in conjunction with a consolidated audit trail, which three Commissioners discussed today, will substantially improve surveillance capabilities.
 
“But requiring broker-dealers to collect the data and the Commission examining it effectively are two different things.  I want to learn more from the Commission about when and how they will analyze the ‘large trader’ data.  We need active regulators and surveillance, not a passive system that permits data to pile-up in back offices.  
 
“For that reason, I believe random samples of the data should be collected by the Commission and thoroughly analyzed, so that the Commission can say definitively that certain trading patterns – if the requisite element of intent can be shown – constitute illegal manipulation.  Moreover, some of this data, in concealed form, should be released to the media and general public – or at least to academics and private analytic firms under ‘hold confidential’ agreements – so that independent analysts can assist the Commission in detecting illegal activity.  If this requires new statutory language, I want to know that from the Commission so that I may push for the necessary changes.
 
“It is time to end the wild west environment in which high frequency trading firms are unbounded by effective surveillance and the possible detection of any manipulative trading strategies.  This is a start, but much more needs to be done.”
 
The proposed rule would, for the first time, require high frequency firms that trade over 2 million shares or $20 million in a calendar day, or 20 million shares or $200 million during any calendar month, to self-identify and obtain a unique identification code. Broker-dealers would then use the ID code to track “large traders” and make the data available to the Commission on a next-day basis. The rule is being considered under the SEC’s existing “large trader” reporting authority.

In a Nov. 20 letter to Chairman Schapiro, Kaufman urged the Commission to move forward with a “large trader” reporting proposal and implement a consolidated audit trail, asserting, “we simply cannot permit high frequency practices to continue unchecked without the ability of regulators to observe and stop manipulation.”  In her Dec. 3 response, Chairman Schapiro assured Kaufman that the Commission would soon put forth such a proposal in order to gain “better baseline information about high frequency traders and their trading activity.”

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