SEC chief hints at new con­trols

Los Angeles Times - - Business - Nathaniel Pop­per re­port­ing from new york

Mary Schapiro says she sees a need for over­sight of high­fre­quency trad­ing and other strate­gies.

Just ahead of a re­work­ing of rules gov­ern­ing stock mar­kets, Se­cu­ri­ties and Ex­change Com­mis­sion Chair­woman Mary L. Schapiro made it clear how she feels about high-speed com­put­er­ized trad­ing, se­cre­tive dark-pool net­works and other reg­i­mens that make trades nearly in­vis­i­ble to or­di­nary in­vestors.

“High-fre­quency-trad­ing firms are sub­ject to very lit­tle in the way of obli­ga­tions,” she said in a speech de­liv­ered at a con­fer­ence of stock and bond traders, “ei­ther to pro­tect sta­bil­ity by pro­mot­ing rea­son­able price continuity in tough times, or to re­frain from ex­ac­er­bat­ing price volatil­ity.”

And as for dark pools — pri­vate net­works used by big-time traders to avoid re­veal­ing de­tails of trans­ac­tions — Schapiro said they cre­ate “po­ten­tial con­flicts of in­ter­est that could cause their or­ders to be han­dled in ways that may not be con­sis­tent” with the best in­ter­ests of or­di­nary in­vestors.

Schapiro’s com­ments come as the SEC is de­vel­op­ing new ex­changes for com­plex se­cu­ri­ties called de­riv­a­tives and is also re­think­ing ex­ist­ing mar­kets in the wake of the fi­nan­cial re­form leg­is­la­tion passed by Congress in July.

The SEC is also about to re­lease its highly an­tic­i­pated in­ves­ti­ga­tion of the May 6 so-called flash crash, dur­ing which the Dow Jones in­dus­trial av­er­age dropped more than 700 points in just 15 min­utes. An­a­lysts have blamed the crash on com­put­er­ized, high-fre­quency trad­ing.

High-fre­quency traders, who use com­puter pro­grams that al­low them to place thou­sands of trades per sec­ond, ac­count for more than half of all stock trades and have largely re­placed the tra­di­tional mar­ket mak­ers who worked at the New York Stock Ex­change.

High-fre­quency-trad­ing firms have de­fended them­selves by point­ing to the speed with which the flash crash cor­rected it­self with­out new reg­u­la­tions. More broadly, they say, they are re­spon­si­ble for the in­creased liq­uid­ity and lower trans­ac­tion costs on cur­rent mar­kets.

But bro­kers have told the SEC that the flash crash shook up in­vestors to the point that it helped cause the volatil­ity and low trad­ing vol­umes that have plagued the stock mar­ket since May.

The agency has been tight-lipped about the find­ings of its in­ves­ti­ga­tion, but Schapiro’s speech Tues­day, and one de­liv­ered two weeks ear­lier, makes it ap­par­ent that she has reached her own con­clu­sions about the prob­lems — and the need for change.

It would be wrong “to ig­nore the is­sues raised by high-fre­quency trad­ing,” she told the traders, “or to as­sume that mar­ket struc­ture and the rules of the road can’t be ad­justed and im­proved.” nathaniel.pop­per@

Alex Wong

WATCH­FUL: The SEC, un­der Mary Schapiro, is about to is­sue its re­port on the May 6 “flash crash.”

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