The Senate Securities Subcommittee today took Congress’ first foray into high-frequency trading (HFT), assessing an array of issues that Chairman Reed (D-RI) argued show that the SEC is “out-classed.” Still, he plans only additional hearings, not any specific interventions, differing – at least so far – with those in the European Union and Australia pushing for a flat-out ban on HFT. Sen. Reed’s concern – strongly supported by several witnesses – is that HFT skews market practice in favor of a limited class of trades, undermining perceptions of fairness needed for an effective and efficient capital market. Ranking Member Crapo (R-ID) was less sure HFT poses problems, although he listened with interest to those presented by witnesses with regard not only to HFT, but also other equity-market practices. These included allegations that market-makers now act only on their own behalf and concerns about the for-profit nature of securities exchanges and the role dark pools play in exchange-traded funds. Sen. Reed is also exploring these vehicles (see Client Reports in the ETF series), although there is no legislation pending with regard to them nor is any likely in the near term on HFT. Instead, this session will have its most immediate impact on an early October SEC roundtable, which will focus on technology concerns raised by HFT and recent market misfires. The hearing touched only briefly on HFT in the commodities market, where Rep. Ed Markey (D-MA) recently called for a CFTC investigation of trading practices. This report analyzes today’s session.
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