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Modern Markets, Modern Metrics - A Blog By IEX

In this blog by IEX's Elaine Wah, the newest public exchange looks to refute public claims that the metrics it uses are designed to inflate its own volume numbers and mislead people.

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October 1, 2010

Congress Courts the SEC

By Peter Chapman

The Securities and Exchange Commission is getting it from both sides these days. In the wake of the May 6 "flash crash," members of Congress from both sides of the aisle are giving the regulator market structure advice. Democrats want the SEC to lay on more rules. Republicans want the regulator to take it easy.

Sen. Ted Kaufman, D-Del., in a letter, urged SEC chairman Mary Schapiro on Aug. 5 to rein in high-frequency traders. "Be bold and move forward," he said.Kaufman wants the SEC to regulate high-frequency traders; impose affirmative and negative obligations on them; and clamp down on their "manipulative trading." The senator wants the exchanges to hit HFTs in their wallets by charging customers on a per-message basis. He also wants the SEC to somehow eliminate the advantage high-speed traders have through proprietary data feeds and co-location.

Kaufman's compadre in the Democratic party, Sen. Charles Schumer, D-N.Y., is also urging the SEC to impose obligations on high-frequency market makers. Schumer blasted the HFTs for abandoning the market on May 6, "leaving a dearth of liquidity and exacerbating market volatility."

Mary Schapiro

Schumer, a member of the Senate Banking Committee, wants any trading firm "effectively" making a market in 25 or more symbols to be subject to affirmative obligations.

As if to counter the Democrats' directives, two members of the Republican party are urging the SEC to go slow. In a letter dated Aug. 24, Rep. Spencer Bachus, R-Ala., and Rep. Jeb Hensarling, R-Texas, both members of the House Financial Services Committee, petitioned Schapiro to base any rule changes on "economic and empirical market data, not political pressure."

The congressmen noted the equity markets functioned well during the turmoil of 2008 and may not need any tinkering. Specifically, they want the regulator to conduct a thorough analysis before banning flash trading; regulating high-frequency traders; imposing obligations on market makers; or building a potentially costly consolidated audit trail system, as well as a "large trader reporting" system.

"Rather than prohibiting practices that have a positive market function, it is our hope that the SEC will seek to better understand the market and become a more sophisticated and thoughtful regulator," Bachus and Hensarling said.

 

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