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Innovations in Trading and Technology

25 January 2013

Congressman Dials-Up Anti-HFT Pressure on the SEC

Representative Ed Markey’s letter to the SEC describes high-frequency trading as a ‘clear and present danger’ to our markets and calls for a curtailing of the practice. But does he expect too much from the SEC?

The latest political attack on high-frequency trading is being prompted by Congressman Ed Markey, a Democrat from Massachusetts in the House of Representatives. In his letter to the current SEC chairman (see PDF, next page), Elisse Walter, and former chairman Mary Schapiro, dated January 18, Markey reminds them of the SEC’s powers to “limit or ban” high-frequency trading.

In stating his argument against HFT, Rep. Markey does not shy away from public record. In order of appearance, he references the European Central Bank, market commentators, a popular academic, an exchange official, and the US government (including the Brady Commission established by President Reagan), as well as the sentiment of ordinary investors. In just more than three pages, Markey expresses some pretty strong opinions about the magnitude of the problem, throwing around the term “volatility” throughout.

Basically, the Congressman argues that HFT is bad because it contributes to excessive market conditions, creates an unequal playing field for market participants, and promotes fear among ordinary investors, discouraging them from investing in US equity markets. While these arguments are not new, Markey ends his letter with a formal request to the SEC chairman asking for a response by February 7, 2013.

[Related:HFT Checkmate: The Alpha in Order Types”]

Congressman Markey should expect to be acknowledged by the SEC. His tenure representing the State of Massachusetts in Congress since 1976 is impressive, and any letter he writes to the Commission deserves its attention. With many issues still under review, however, I expect the SEC will respond with some type of overview of the rules that have been enacted along with an explanation along the lines of: The Commission is still working to understand HFT issues and this is a top priority for 2013.

Meanwhile, the timing of the letter is intriguing. While any politician spending more than 35 years as a member of Congress will touch many issues, Markey is not especially known for his legislation in the financial trading community. As Senator John Kerry is the likely favorite to become Secretary of State, Markey has been racking up endorsements from major financial reform advocates (including Kerry himself and Barney Frank) while making a run for Kerry’s open seat in the US Senate. Perhaps going on the HFT offensive is an acknowledgement of the influence major single-day events have had on potential voters.

Politics aside, Congressman Markey offers parallels to the October 19, 1987, market crash and the government’s response as the basis for his recommendations. Three years after Black Monday, President Bush signed into law the Market Reform Act of 1990 (authored by Markey), which seems to have provided the SEC with greater oversight in handling market volatility, manipulation of price levels, and any trading practices that contribute to volatile market conditions.

By stating, “I believe high frequency trading is a clear and present danger to the stability and safety of our markets, and that its use should be curtailed immediately,” Congressman Markey certainly grabs headlineattention. With many pieces of evidence to the contrary, however, he leverages few facts that explain how implementing such actions could be made possible.

Once again, it seems we have reverted to a very simplistic view of high-frequency trading and why it is bad for the industry. Nevertheless, Rep. Markey keeps the HFT debate lively. It should be interesting to see how the SEC responds considering the pressure it already is under.

Markey_HFT by

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12 Comments to "Congressman Dials-Up Anti-HFT Pressure on the SEC":
  • Anon_avatar
    Anonymous

    25 January 2013

    Just another pandering politician. This one wants Kerry's senate seat so he jumps in on a topic he knows nothing about.

  • Anon_avatar
    Anonymous

    28 January 2013

    The most ridiculous uninformed letter I have ever seen on the topic. 

  • Missing
    wsteetpro

    28 January 2013

    I guess you both work for HFT shops. It's about time we address this cancer.

  • Missing
    John Harris

    28 January 2013

    Have you confirmed that Markey actually wrote this letter? I ask because I am pretty sure it was actually written by the folks at The Onion. Either way, it's pretty funny. I hear all the time that the markets are rigged, but the people saying that are usually talking about Fed policy, bailouts of government-protected banks, and the ability of executives at really large banks to engage in fraud without fear of prosecution.

    But I especially loved the part about the SEC's authority to ban activities that manipulate the level of the equity markets. That's hilarious! I can see the headline now: "SEC orders Federal Reserve to cease and desist from monetary policies designed to influence equity prices."

  • Anon_avatar
    Anonymous

    28 January 2013

    I hate to be a stickler here but I don't know anyone who day trades their 401k.  If he is using that as an umbrella to cover retirement accounts, then okay I suppose.  It does make me wonder how much he really knows about the issues and is merely using the debate to create PR for himself.  What a crazy thought on my part.

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    shamlet76

    28 January 2013

    you guys remind me of the hubris of lehman brothers before the crash.  HFT cannot be sustained.  there is no business purpose for theft.

  • Anon_avatar
    Anonymous

    28 January 2013

    I don't know enough to say it's theft but the genie is out of the bottle and we are not going back to an abacus.  I think perhaps if politicians like Ed Markey didn't play a game of chicken with the American Public on the debt ceiling issue we would all have been better off, don't you?  

  • Missing
    shamlet76

    28 January 2013

    the US debt problem is DWARFED by the fraud in our financial markets.  just how does the financial market expect to pay off $800 trillion in debt swaps?  since world GDP is about $65 trilion, perhaps someone needs to look at their hold card.  the US government debt is manageable compared to the debt and leverage in the financial market.

    that topic has NO RELATION to the topic at hand.  

  • Missing
    UpHillStill

    28 January 2013

    I don't see where retail investors are getting shafted more in the HFT regime than the old specialist system. If anything, they get cheaper execution than before-the specialists played all kinds of sneaky games as well.  Larger institutional investors and speculators do get hurt however as they need to become HFT gamers as the old specialist or market maker would have given them a more consistent execution in the past. 

    As to whether HFT creates market instability, that's another question. 

     

  • Anon_avatar
    Anonymous

    28 January 2013

    To wsteetpro: since I believe the letter is ridiculous that makes me an employee of an HFT shop?  It's people like you who will continue to turn these discussions into the WWE instead of a reasoned and intelligent debate.  If you actually READ Congressman Markey's letter you would understand he pretty much equates EVERYTHING that is electronically traded to being HFT.   I find it rather sad that we are going to sit back and let the politicians, grossly misinformed ones like Markey, regulate the markets into irrelevance.  If that's what you wish wsteetpro then congrats you have your champion.

  • Missing
    mortimer

    28 January 2013

    Anonymous: swtreetpro thinks that you are part of the evil HFT cabal.. you know, the one whose weekly meetings include dozens of russian phd programmers punching their keyboards and then cackling with joy when they make a stock move 10 cents. Don't try to deny it, we know you exist.... LOL!

  • Comment_g_bollenbacher2
    gbollenbacher

    28 January 2013

    This may be the last time Matt Simon writes as serious article on a political subject. Matt, be warned!

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