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June 1, 2010

Kaufman's Crusade

By James Ramage

"If we don't have transparency, we don't really know if [high-frequency trading] is reducing costs," Kaufman said. "People are going to imagine that it's reducing costs, but no one really knows if it is, because no one knows what the costs would've been without it."

One HFT exec responded that Kaufman has it wrong: HFTs want transparency, too. From concepts such as large trader to colocation, more transparency makes for healthier markets, he said.

"The implication is that we are somehow intentionally blocking transparency, which couldn't be further from the truth," the HFT exec said. "Disclosure is great. Making it clear what the rules are for colocation is good; we want regulatory oversight assistance in that regard."

Such explanations, however, haven't swayed Kaufman. He has brushed aside industry studies that purport to show that HFTs have reduced trading costs through narrowed spreads. Narrowing the difference between the bid and ask doesn't necessarily equate to lower costs for investors if the bid and ask are mispriced, Kaufman said.

"Is there a lot more trading going on? Absolutely," Kaufman said. "Is it more liquid and are you getting better prices? You can say that all you want to, but I want someone to go in there and find out what's going on."

Looking forward, Kaufman has started to attack the topic of "too big to fail." At one point, he had to break away from our office interview to tape another in the Russell Senate Office Building rotunda with CNN on "too big to fail" and financial reform.

But he's not through with high-frequency trading, or other issues affecting the equities markets. Recently, Kaufman voiced the need to understand HFTs better following the May 6 "flash crash."

On May 18, Kaufman issued a statement praising regulators' efforts following the SEC's proposed rule for market circuit breakers that would pause trading in certain stocks in some circumstances. He added that regulators need to address the crash's cause, which Kaufman suspected involved HFTs.

His time is limited, though. Kaufman will not run in the election this fall and will step down from the Senate after his term ends this year. But he said he still wants to leave his mark on issues that will have repercussions long after he departs.

"I think this is close to an emergency," he said. "We have these massive changes going on, loads and loads of money involved, and we don't really know what's happening [with HFTs]. There's no regulation. That's a very scary thing to me. If we have a major meltdown sometime in the future because we haven't done this, history will judge us harshly."


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