Yet another US lawmaker is going on the attack against high-frequency trading, dark pools and flash orders – and some commentators applaud the growing push to expand the scope of complaints against such sophisticated investing tools.
Democratic Delaware Senator Ted Kaufman on Monday asked the SEC to review seven “questionable market structure issues” including flash orders and dark liquidity pools in a letter to SEC Chairman Mary Schapiro, saying: “I am concerned that questionable practices threaten to further erode investor confidence in our financial markets and that our understanding and regulatory capacity have not kept pace with those changes…I believe the SEC’s rules have effectively placed “increased liquidity” as a value above fair execution of trades for all investors”.
Furthermore, warned Kaufman, market practices such as HFT may erode the confidence of investors. As Bloomberg reports, the Senator asked Schapiro to analyse the market practices “before piecemeal changes” are made that “exacerbate the unfairness”.
But, notes BusinessInsider, such trading practices may not be such a bad thing:Professional investors will always have an edge over the general population and the more people recognize that, the better. “Investor confidence” may actually backfire: it’s better to have the average person skeptical of the markets and in turn focus on long-term investing than having Jane and John Public think they can outsmart Goldman Sachs and JPMorgan on quick trades.
“Too much regulation”, it says, could “hurt an already troubled financial sector”:
As Reuters notes, more than 60 per cent of all US equity volume is estimated to involve high-frequency traders and that any curbs on high-frequency trading “could drive down trading volumes, boost volatility, and hit the revenue of financial firms and exchange operators”.
Senator Charles Schumer, a New York Democrat, has also pressed the SEC to rein in the strategies, saying last month that computer-driven trading by hedge funds and Wall Street firms gives them an unfair advantage.
Schapiro in early August said the SEC was reviewing so-called flash orders, the practice of paying exchanges to view order-flows that are about to be routed out to competing platforms. While Kaufman wants that banned – he is also pressing for a much broader review of all practices encompassing high-frequency and algorithmic trading, including exploitation of dark pool liquidity.
All kudos to him, says Reuters blogger Matthew Goldstein, for pushing securities regulators to widen their scope:
The Delaware senator is taking the right approach in asking the SEC to conduct a broad review of HFT, so-called flash orders and dark pools. It’s a much better approach than the more narrow one taken by Senator Chuck Schumer, who last month focused solely on the impact of flash orders on the market.While the issue of flash orders is important, it’s pretty clear that most HFT traders are not getting an early sneak peak at the order flow coming into regulated exchanges. But Schumer was quick to zero in on flash orders simply because that’s what a story in The New York Times mainly focused on.Unfortunately, Schumer’s own letter to the SEC put too much focus on flash orders and made it sound like that was what HFT is all about. Kaufman, however, is helping to recalibrate the debate about HFT with his own letter to SEC Chairman Mary Schapiro.One can only hope that Schapiro will be as responsive to Kaufman as she was to Schumer.
Related links:
Exchanges should unite to end flash orders: Bob Greifeld – FT.com
A defence of HFT by NYSE Euronext – FT Alphaville
The dash to flash – FT
PR flashing at ICE - FT Alphaville
Electronic trading and commodity prices – FT Alphaville