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April 1, 2010

Sen. Ted Kaufman on HFT

By Editorial Staff

Sen. Ted Kaufman, D-Del., first caught Wall Street's attention with his call to bring back the uptick rule. Now he is zeroing in on high-frequency trading. He gave a speech on the floor of the Senate last month, in which he petitioned the SEC to take a hard look at the growing practice.


On the risks posed--

High-frequency trading poses two risks: systemic risk to the market and the risk of manipulation. It is high time that we weigh the risk of major high frequency trading errors against the supposed "efficiency" benefits of cutting down trading speeds by several milliseconds.


On a lack of transparency--

Our regulators have been unable to shed much light on these opaque and dark markets, in part because of their limited understanding of the various types of high-frequency trading strategies. Needless to say, I'm very worried about that.


On a lack of information--

I am concerned that academics and other independent market analysts do not have access to the data they need to conduct empirical studies on the questions raised by the SEC in its concept release.


On the need for disclosure--

The SEC [should] implement stricter reporting and disclosure requirements for high-frequency traders under its "large trader" authority. We need the SEC to require tagging and disclosure of high frequency trades so that objective and independent analysts--at FINRA, in academia or elsewhere--are given the opportunity to study and discern what effects high frequency trading strategies have on long-term investors; they can also help determine which strategies should be considered manipulative.


On manipulation--

Regulators must better define manipulative activity and provide clear guidance for traders to follow, just as Britain's regulators have done in the area of spoofing. By providing "rules of the road," regulators can create a system better able to prevent and prosecute manipulative activity.

Sen. Ted Kaufman


On naked access--

The SEC's proposal on naked access is a good first step, but exchanges must also be directed to impose universal pre-trade risk checks. If left solely in the hands of individual broker-dealers, a race to the bottom might ensue.


On the surge in cancelled orders--

Their use in today's marketplace is clearly excessive and virtually a prima facie case that battles between competing algorithms, which use cancelled orders as feints and indications of misdirection, have become all-too-commonplace, overloading the system and regulators alike.


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