Book by high-profile author Lewis may spur high-frequency-trading reform push, success unclear

April 2, 2014

By Emmanuel Olaoye, Compliance Complete

WASHINGTON/NEW YORK, Apr. 2, 2014 (Thomson Reuters Accelus) – During a clip on Sunday night’s “60 Minutes” program, host Steve Kroft asked bestselling author Michael Lewis why he was so opposed to high frequency trading.

“If it wasn’t so complicated, it would be illegal,” said Lewis, who is the author of a new book called “Flash Boys: A Wall Street Revolt.” 

Lewis had a wide public following for his books on Wall Street, such as “The Big Short” exploring trading practices at the heart of the financial crisis. His comments on “60 Minutes” triggered a debate about high frequency trading across the media and on social media platforms.

Advocacy groups on both sides of the issue immediately released statements to the press to back up their position.

Lewis’s stance that high speed traders use complex strategies to mask illegal behavior lies at the heart of the differences between the supporters and opponents of high speed trading.

HFT supporters say that it lowers trading costs for all investors, while the critics say the traders use their faster computers to manipulate stock prices in their favor.

But it is unclear whether the attention that Lewis received from the program will have any meaningful impact on the SEC and CFTC’s plans to regulate high speed trading.

Dennis Kelleher, the president and chief executive officer of Better Markets, the Washington based advocacy group, said he hopes the attention from the “60 Minutes” program will lead to a public outcry on an issue that has been placed on the backburner in Washington.

“The HFT market of today is the OTC market before the crisis. There are no transparency and no regulation,” Kelleher said.

“There is no one in Washington who is serious about protecting markets from these predatory practices. Michael Lewis’s book is an opportunity to shine a light on what is going on in this dark market,” said Kelleher.

High frequency traders use high speed systems to monitor market prices and submit large numbers of orders to the markets. They often use algorithms to speed up their market access and execute their trades.

The May 6, 2010 “flash crash” – where the market plunged by more than 5 percent before rebounding – is the most notable market disruption that is associated with high-frequency trading.

But a study by the SEC and the CFTC concluded that high-frequency trading did not cause the crash.

The SEC has taken steps to improve its oversight of electronic trading. The agency also launched its MIDAS (or market information data analytics system) program last year. MIDAS collects and sifts through massive amounts of trading data across markets, saving weeks or months of staff time.

It also hired Greg E. Berman to work in its trading and markets division. Berman, who is the associate director of analytics and research, oversees the research that informs the SEC’s policies on markets and market structure.

But the SEC needs more experts, Kelleher said, adding that the SEC’s thinking on high speed trading is being dominated by a few smart people instead of a broad range of experts. “If there was a flash crash today, the SEC would still have the same inability to figure it out,” he said.

More public interest in high frequency trading will spur state regulators like New York Attorney General Eric Schneiderman to reform the practice, Kelleher said he hopes.

Schneiderman has said that exchanges and private trading venues give HFT firms unfair technological advantages that allow HFTs to see key trading data.

Harvey Pitt, a former Republican Chairman of the SEC, said there was no doubt that high-profile attention can have an impact on the debate about a particular issue. The attention generated by Lewis’s appearance may prompt some lawmakers in Congress to seize the issue to grab headlines and attempt to burnish their images as pro-consumer.

But it is unlikely to affect the SEC’s thinking on how HFTs should be regulated. He said high frequency trading is one of many areas related to market structure that the SEC is focusing on. “Beyond this, the SEC has ample authority to deal with abuses triggered by HFT. To the extent high frequency traders submit bids with no intention that those bids be accepted (to test market pricing), the SEC’s ability to treat such artificial bids as manipulative devices seems clear.”

The Modern Markets Initiative, a group formed recently to advocate for the interests of high-speed traders, has stepped up its campaign defending the industry sector.

“Any abusive practices or behaviors that might be hurting investors should be removed no matter the frequency of trading. As regulators and industry leaders search for ways to improve our markets, they must recognize that banning or mischaracterizing all of HFT is not the answer and would only serve to damage end investors,” the group said in a statement released on Friday in advance of the Lewis “60 Minutes” appearance.

(This story was updated to include comments from Harvey Pitt.)

(This article was produced by the Compliance Complete service of Thomson Reuters Accelus. Compliance Complete provides a single source for regulatory news, analysis, rules and developments, with global coverage of more than 400 regulators and exchanges. Follow Accelus compliance news on Twitter: @GRC_Accelus)

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