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June 1, 2010

Kaufman's Crusade

By James Ramage

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Regulators have been busy changing the equities markets, Kaufman acknowledged, but have made some mistakes. He expressed disappointment that no regulation over the past few years prevented the precipitous market slide in the first quarter of 2009. Kaufman shook his head as he described how the absence of an uptick rule enabled a wave of short selling to topple the stocks of Bear Stearns and Lehman Brothers. His voice rose when he defended the overall need to have greater scrutiny of trading practices-despite industry resistance.



Uptick Rule Interest

The Kaufman amendment does not target any practice in particular, he said. His goal is to entrench the concept of transparency within all markets. Bringing more transparency to, say, dark pools and high-frequency trading practices would increase fairness and security in the markets, Kaufman said.

Not everyone is convinced that Kaufman is on the right track, though. Security Traders Association chairman Brett Mock is skeptical and concludes that Kaufman's aim is to create a central limit order book, which the industry has rejected in the past, as such a book would lessen competition.

The reason partly behind Kaufman's activism stems from being a retail investor himself. He's been investing for almost 50 years, which includes making some of his own trading decisions. When Kaufman began his two-year Senate term last year, it was just before the Dow Jones Industrial Average plummeted to its lowest point in more than a decade. He learned enough from both to develop strong opinions about the equities markets.

Sen. Johnny Isakson, R-Ga.

He traces his interest in helping to shape the way stocks trade back to the uptick rule, which the Securities and Exchange Commission abolished in 2007. To his thinking, the uptick rule stood as a sturdy barrier against bear raids for decades. And when the stocks of both Lehman Brothers and Bear Stearns plummeted during the crisis of 2008, it was "predatory bears" selling short without securing the shares beforehand that played a significant role in driving them down, Kaufman said. Subsequently, he made the uptick rule's return his first cause in the equities markets. 

And he's had allies in this campaign who have trusted his knowledge of the markets. Sen. Johnny Isakson, R-Ga., was one of them. He worked with Kaufman on legislation to bring back the uptick rule and stop naked short selling. Seated in his office, Isakson discussed Kaufman's expertise and commitment to the cause.

"He is a more recognized authority than I am [on short sale], and I think he was on the right track," Isakson said. "What struck me the most about Sen. Kaufman was the fact that he is such a genuinely good person who is clearly motivated by his desire to do what's right."



Letter to the SEC