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Public Statements

Wall Street Journal - Kaufman on High Frequency Trading

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By Matt Phillips

Sen. Ted KAUFMAN (D., Del.) has been banging the drum on the need for regulatory changes to high frequency trading for a while.

His latest thoughts on the matter take the form of a letter to SEC Chairwoman Mary Schapiro urging -- among other things -- major high-frequency trading firms be required to register with the Securities and Exchange Commission. Dow Jones Newswires' Jacob Bunge reports:

In addition, regulators should consider requiring chief executives of computer-driven trading firms to certify under oath that their algorithms do not manipulate prices in U.S. stock and derivative markets, according to KAUFMAN.

"In the aftermath of the flash crash, this is an historic moment for the Commission, a moment when it must fulfill its obligation as steward for those investors who lack the clout of Wall Street's largest financial players," the senator wrote in an Aug. 5 letter to Mary Schapiro, chairman of the SEC.

KAUFMAN's letter to Schapiro came as the SEC and the Commodity Futures Trading Commission prepare to issue in early September a final report on the market events of May 6, when the Dow Jones Industrial Average dropped by nearly 1,000 points before swiftly recovering.

As we've noted before, at the heart of events of the May 6 "Flash Crash," was a decision by certain market makers to cut back trading, and in some cases pull out of the market all together. Since so much of the market's liquidity comes from high-frequency trading or statistical-arbitrage firms, some say there should be additional obligations to ensure that these firms don't pull out of the market.

Last week, New York Sen. Chuck Schumer offered some of his suggestions on how to sort out the obligations of market makers, whom he seemed somewhat sympathetic toward. He noted that since some of the obligations he proposed were "burdensome and making markets is voluntary … the Commission should consider appropriate incentives for high frequency traders to become market makers."

KAUFMAN seems to be taking a tougher line with respect to market makers. In his letter to the SEC he writes:

The SEC should impose some liquidity provision obligations on high frequency traders. Enhanced requirements should be crafted to encourage high frequency traders to post two-sided markets and supply investors with a consistent source of deep liquidity. In addition to affirmative liquidity provision obligations, the Commission should consider instituting negative obligations as well.

We have a hunch on which approach the industry is likely to prefer. At any rate, the KAUFMAN letter is worth a read for market wonks. Check it out.


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