“The markets are not rigged,” said SEC Chair Mary Jo White in a House Financial Services Committee hearing today.
There are only so many ways to say that and White likely used all of them as committee member after committee member brought up the claims published in Michael Lewis’ latest book, ‘Flashsboys: A Wall Street Revolt.’
At this point the book’s message should be familiar. Lewis tells the story of a bunch of traders at the Royal Bank of Canada who discovered that high frequency traders, in collusion with stock exchanges, have gained an unfair advantage in the market to the detriment of everyone else — big and small investors alike.
White said that the issue was a top priority at the SEC, but gave no timeline for its investigation. This did not settle the Lewis fans in the room.
Congressman Mike Capuano said that the purpose of the SEC was to protect people from “shysters” in the market, and to instill confidence in it. The problem, he said, is that no one has confidence that the SEC can even do that job.
“If we don’t believe it,” he said, “it doesn’t exist.”
After Capuano’s questioning White said that the SEC recognised that Regulation National Market System (Reg NMS), a 2007 regulation that was supposed to bring stock trading into the future, may have resulted in unintended consequences.
That’s really the messy world that White says her agency “could not be doing a more extensive review” of.
Some Congressmen had a looser grasp on the specifics of the issue, but had no problem making their discomfort unknown.
Take Colorado’s Ed Perlmutter for instance.
“Virtual financial said in 5 years they had one day of trading losses,” Perlmutter said incredulously, “…there seems to be a definite advantage for a firm that can operate for 5 years without any trading losses.”
He meant Virtu, the high frequency trading firm that has delayed its IPO indefinitely because of the fallout from Lewis’ book.
“…these HFT are holding positions in a matter of seconds,” Perlmutter continued.
Actually, they’re holding them for tiny fractions of a second. According to the SEC itself, 38% of trades are held for 50 milliseconds or less.
So when Warren Buffett gets on CNBC, like he did this morning, and says the investing game hasn’t changed, that simply isn’t true for everyone in the market. Some people are playing something entirely different.
The problem is that this new game unintentionally created by Reg NMS is hard to put your finger on. In the middle of the hearing Michigan’s Bill Huizenga (R) announced that his 13 year-old daughter was in the room. He apologized for the density of the topic.
“Most people here don’t understand what we’re talking about either,” he said.
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