rssWarner, Kaufman Propose Regulating High Frequency Trading
Friday, May 07, 2010 at 5:17 pm
- 27 Comments
After yesterday’s market boomerang — when the Dow Jones Industrial Average cratered nearly 1,000 points before rebounding, all in a matter of minutes and possibly because of a computer trading system error — Sens. Mark Warner (D-Va.) and Ted Kaufman (D-Del.) say that they want an inquiry into high-frequency trading.
These algorithmic trading systems now account for more than half of trading volume — making the system more fragile, the senators contend. Both made the same point during yesterday’s floor debate as well.
The two put out a press release today, saying:
“A temporary $1 trillion drop in market value is an unacceptable consequence of a software glitch,” said Kaufman and Warner in a joint letter to Senate Banking Committee Chairman Chris Dodd (D-CT), requesting that their directive to the SEC and CFTC be inserted into the Manager’s Amendment of the Wall Street reform bill. “We are concerned that as markets rely on and entrust such a high percentage of the capital management of the market to black-box trading systems that systemic problems may be created,” added the two Senators.
The Kaufman-Warner addition would direct the SEC and CFTC to report to Congress within 60 days of the enactment of the Wall Street reform bill the following:
- The causes of the May 6 market dive;
- How the SEC can evaluate whether the proprietary trading activities of major banks employ algorithmic trading practices that represent potential systemic risks to the markets;
- The potential need for industry-wide pre-trade operational risk controls that would minimize the incidence and magnitude of any trading errors;
- How the agencies can gain analytical assistance from academics and private analytic firms under controlled conditions to conduct analyses on whether certain algorithmic trading strategies are harmful to the interests of long-term investors; and
- How the agencies intend to “tag” high frequency traders over a certain volume threshold and use the data collected to gain a better baseline understanding about high frequency trading activities
The amendment would likely be popular. But for Sen. Chris Dodd’s (D-Conn.) financial regulatory reform proposal, popular is not enough. Dodd and Sen. Harry Reid (D-Nev.) are carefully weighing which amendments to allow to come up for a vote, as each amendment eats up floor time from others and delays the final vote on the bill.
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[...] Industrial Average Democratic Senators Mark Warner of Virginia and Ted Kaufman of Delaware have called for an investigation of high frequency trading where the computer glitch that caused the crash [...]
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[...] High-frequency trading uses sophisticated computer algorithms to determine when a stock is likely to tick up or down. Some of these systems buy and sell hundreds of times in the space of a second, making tiny profits each time. By some estimates, high-frequency trading now accounts for more than half of all stock market volume. [...]
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