By Jonathan Spicer
Lawmakers pitching remedies for the U.S. stock market have politicized obscure concepts such as naked access and high-frequency market-making and ratcheted up pressure on regulators following the May "flash crash" that rattled investors.
At least six U.S. senators and representatives have written letters to the Securities and Exchange Commission this year, most responding to the unprecedented May 6 crash in which the Dow Jones Industrial average .DJI plunged 700 points in a matter of minutes.
The letters raise and sometimes judge esoteric market developments such as circuit breakers, dark pools, the fragmented marketplace, flash orders, consolidated order books, manipulative algorithms and maker-taker pricing models.
Senators Charles Schumer and Ted KAUFMAN jumped into the market structure debate as it picked up speed last year and have since pushed for a muscular regulatory response to the crash.
Representatives Spencer Bachus and Jeb Hensarling were the first Republicans to pen a letter on the issue, urging the SEC on August 24 to base any new trading rules on thorough analysis and not on political pressure.
"What I see ... is a tendency to, when in doubt, regulate it. And my tendency would be to, when in doubt, let market competition work," Hensarling, ranking member of the House subcommittee on financial institutions, said in an interview.
All this congressional interest helped to keep the flash crash center stage at the SEC this summer, even as lawmakers passed a landmark Wall Street reform bill that saddles the regulator with nearly 100 new rules that need to be written.
As the debate over the electronic market gains a higher profile now only two months before U.S. congressional elections, some industry veterans are growing nervous.
"The last thing we want is for senators to be advocating major market structure changes. They're probably least prepared to understand the complexity of the markets," said George Hessler, CEO of broker dealer Stock USA Execution Services.
"We have seen that, while the SEC has generally shown restraint and caution in proposing rules, it has occasionally shown itself to be vulnerable to political and popular pressure," he said, pointing to the brief 2008 ban on short selling financial stocks.
'EVERYTHING IS POLITICIZED'
While the 2007-2009 financial crisis revealed deep problems in the complex derivatives and securitization markets, the traditional stock markets ran relatively smoothly.
But since May 6, when the Dow lost then recouped some 700 points in about 20 minutes, politicians have found a far more familiar issue on which to weigh in on Wall Street.
Congressman Edward Markey urged the SEC on May 11 to "act forcefully" to adopt harmonized market-wide circuit breakers, which the SEC soon did. Congresswoman Melissa Bean, also a Democrat, urged the SEC on May 28 to expand the list of stocks covered by new circuit breakers, which the SEC later did.
KAUFMAN has gone much further.
His warnings last year about the dangers of high-frequency computerized trading were in part realized by the flash crash, giving a boost to the senator's 11-page letter of August 5 that proposes a serious rethink and some big changes to the market.
"At a minimum, the Commission must carefully scrutinize and empirically challenge the mantra that investors are best served by narrow spreads," KAUFMAN wrote. "In the aftermath of the flash crash, this is an historic moment for the Commission ..."
Robert Colby, former deputy director of the SEC's trading and markets division, said the regulator faces less political resistance than during the lead-up to Regulation NMS, a sweeping 2005 rule that revamped U.S. stock markets.
"This time around I get the sense that congressmen feel something should be done, they worry, but their approach is not deeply ideological," said Colby, now counsel at law firm Davis Polk & Wardwell LLP.
The flash crash has drawn two letters from Schumer, the influential New York senator who originally jumped into the fray last summer when The New York Times ran a front page article about so-called flash orders.
The letter from Bachus and Hensarling is the first sign that partisan politics could play a role in coming months.
"This area in particular is one where Republicans ... think they have a political winner in just saying 'no' and associating whatever is proposed with the President," said Robert Shapiro, chairman of market and policy advisory firm Sonecon LLC. "Everything is politicized right now."