Senator Kaufman continues pressing SEC on HFT

Senator Kaufman gave another speech on the Senate floor yesterday continuing to press the SEC for a broad review of high frequency trading.  The Senator clearly understands the issues that are facing our equity markets and is not afraid to ask questions. We applaud Senator Kaufman and his effort to shine a light on a very murky area of the equity market.  Here are some key excerpts from his speech:

“Regulators simply must keep pace with the latest market developments.  Three examples from the current debate are especially illustrative of this need: co-location of servers at the exchanges, flash orders, and direct market access.”

1)  “When the exchanges first began to permit traders to place their computers on-site, giving these traders a few micro-seconds advantage, the SEC did not insist on regulatory approval.  The Commission simply let it occur.  There was no active consideration then, as I have called for now, of the means by which “fair access” can be preserved.”

2)   “The same is true for flash orders.  In May, the SEC staff permitted Nasdaq and BATS Exchanges to introduce flash-order offerings even though both admitted that the practice was of dubious value and that they simply were being driven to adopt it by the loss of market share to competitors.”

3)    “Direct market access is another practice that deserves closer examination.  Such agreements allow high-frequency traders to use their broker’s market participant identification to interact directly with market centers.”

“But, in an automated age, these changes need to be subjected to a holistic analysis of their collective impact on the markets and our regulatory infrastructure. The same is true for high frequency trading, dark pools, payment for order flow, liquidity rebates, and other market structure issues.  The rapid rise of high-frequency trading and dark execution venues has quite simply left our regulatory agencies playing catch up.”

“What does all this mean for the long-term investor?”

“Trading is not only faster, it is also quickly becoming less transparent.  Twelve percent of trades are now conducted in dark pools, compared to less than 1% six years ago.   And substantial percentages of trades are internalized at broker-dealers, never reaching a public exchange.”

“Do these high-tech practices and their ballooning daily volumes pose a systemic risk?   To take just one example, is anyone examining the leverage these traders use in committing their capital in such huge daily volumes?”  

“It is in the nature of our financial markets to push the envelope, to take on more and more risk, and to exploit any crack in the wall when there are profits to be won. But to have a full accounting, we also need to add up the costs to the long-term investor, to financial stability, to innocent bystanders, of each new generation of innovation.”

“Our goal is not to stop high-frequency trading.  We don’t want to slow it down.”

“Liquidity, innovation, and competition are critical components of our financial markets. ”

“But we cannot allow liquidity to trump fairness, and we cannot permit the need for speed to blind us to the potentially devastating risks inherent in effectively unregulated transactions. ”

“We cannot forget that fair and transparent markets are cornerstones of our American system.”

Here is a link to the full text of his speech: