Thursday, January 24, 2013

In Letter to SEC, Rep. Markey Says Use Market Reform Act of 1990 to Limit High Frequency Trading

In a letter to SEC Chair Elisse Walter, Rep. Edward Markey pointed out that a section of the Market Reform Act of 1990 gives the SEC broad powers to limit or ban high frequency trading. He believes that high frequency trading is a clear and present danger to the stability and safety of the financial markets and that its use should be curtailed immediately.  Rep. Markey expects a response from Chairman Walter by February 7, 2013.

Section 9(i) of the Exchange Act, added by the Market Reform Act, authorized the SEC to limit or prohibit practices which result in extraordinary levels of volatility. While  originally designed to give the Commission the ability to curtail program trading, reasoned Rep. Markey, Section 9(i) could also be used to restrict or ban high frequency trading. If the SEC makes a finding that the financial markets are currently in a period of extraordinary volatility and that high frequency trading is reasonably certain to engender such levels of volatility, emphasized Rep. Markey, the Commission could immediately promulgate rules restricting or eliminating the practice.

Further, given that numerous commenters have already pointed out that the level of market volatility is at historically high levels and that high frequency trading augments that volatility, both of these findings could be made very easily. In his capacity as Chair of the House Telecommunications and Finance Subcommittee, Rep. Markey authored the provisions of the Market Reform Act that authorized the Commission to crack down on program trading.

More broadly, Rep. Markey said that high frequency trading has established bifurcation in the markets in that well-financed and sophisticated trading firms make full use of light-speed high frequency trading algorithms while ordinary investors remain at more terrestrial speeds. Ordinary investors are increasingly citing high frequency trading as evidence that markets are a rigged game where large firms with a high-speed  supercomputing terminal can always outperform ordinary investors.

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