Several members of the U.S. Congress engaged in further debate during the month of August over the role of high-frequency trading in the U.S. equity markets. Two Democratic members of the Senate called for greater regulation of high-frequency trading, while two Republican members of the House came out in defense of this type of trading activity.
On Aug. 5, Senator Ted Kaufman, a Democrat from Delaware, submitted a list of nine regulatory recommendations to the Securities and Exchange Commission to address what he called “serious flaws” in the structure of the U.S. equity markets. Kaufman specifically urged the SEC to create an “effective regulatory regime” for high-frequency traders. This should include finalizing its large trader tagging and consolidated audit trail proposals, requiring high-frequency traders to certify that their algorithms do not manipulate market prices, issuing guidance on the types of trading patterns that would constitute unlawful manipulation, and imposing “liquidity provision obligations” on high frequency traders.
On Aug. 11, Senator Charles Schumer, a Democrat from New York, wrote a letter to SEC Chairman Mary Schapiro urging the agency to impose market maker obligations on high-frequency traders. Schumer outlined several specific conditions for such obligations, but noted that the SEC also should consider “appropriate incentives for high-frequency traders to become market makers given the cost of these obligations.
On Aug. 24, Representatives Spencer Bachus, a Republican from Alabama, and Jeb Hensarling, a Republican from Texas, sent a joint letter to Schapiro protesting the “ad-hoc” nature of SEC rule-makings in this area and urging the agency to rely on “economic and empirical market data, not political pressure,” in determining how to respond to changes in market structure. The two lawmakers, who sit on the House Financial Services Committee, asked Schapiro to provide the SEC’s analysis of the costs and benefits of several proposed rules and urged the agency to consider the potential impact on liquidity providers.
