Senator Seeks Broad SEC Market Study

The Wall Street Journal
AUGUST 24, 2009
By GEOFFREY ROGOW
Sen. Ted Kaufman (D., Del.) is expected on Monday to call for the Securities and Exchange Commission to review all forms of current stock-market structure, signaling the broadest statement yet from a legislator in the continuing debate over the growth in high-frequency trading, a lightning-fast, computer-based trading technique.
In a letter reviewed by Dow Jones Newswires to be sent to SEC Chairman Mary Schapiro on Monday, Mr. Kaufman said regulatory moves in the past decade have had the unintended consequence of making the stock market too fragmented, possibly giving high-speed traders an advantage over retail investors. Mr. Kaufman wrote that there are now a series of potential conflicts of interest on Wall Street trading desks trying to serve both retail clients and high-frequency firms.
"I request the SEC undertake a comprehensive, independent 'zero-based regulatory review' of a broad range of market-structure issues, analyzing current market structure from the ground up before piecemeal changes built on the current structure increase the potential for execution unfairness," wrote Mr. Kaufman. In a zero-based regulatory review, each part of the current market structure would be reviewed comprehensively, as opposed to a traditional review of one particular type of market structure.
John Nestor, a spokesman for the SEC, said he couldn't comment on the letter, but added: "We are developing plans to more broadly examine other market structure issues."
Ms. Schapiro has set her agency's sights on dark pools, private venues where large blocks of securities are traded anonymously; and flash orders, which give some market participants on certain stock platforms a chance to act on stock orders before they are routed to other venues for filling. An increase in the use of both has been at the center of regulators and congressional leaders' growing concern about high-frequency trading.
On the issue of dark pools, Mr. Kaufman questions whether the more-than-50 execution venues, which include exchanges and dark pools, are being monitored for both best execution and the national best bid and offer, as mandated by the SEC. Moreover, he questions whether the national best bid and offer could even be quantifiable, given the amount of trading done in these hidden markets. According to Rosenblatt Securities, about 7% of all stock transactions have occurred in a dark pool in the past few months.
High-frequency trading makes up more than 60% of stock trading volume, according to both Tabb Group and Aite Group.
Few high-frequency traders have publicly resisted regulatory review. These traders contend the growth in high frequency has helped lower transaction costs and improve stock spreads, a benefit to all investors, and say a full review would highlight merits of the growth.