Earlier today we announced a secret meeting Senator Kaufman was holding to discuss how high frequency trading played into what happened yesterday.
We suspected that Kaufman would propose new legislation that will help regulators understand what HFT traders do and how to limit any damage they might do.
We were right. The Senator just announced that he and Senator Warner are proposing an addition to the Senate’s Wall Street reform bill that would direct the SEC and the CFTC to report to Congress by 60 days and tell them what HFT had to do with the market crash yesterday.
“A temporary $1 trillion drop in market value is an unacceptable consequence of a software glitch,” said Kaufman. “We are concerned that as markets rely on and entrust such a high percentage of the capital management of the market to black-box trading systems that systemic problems may be created,” they said.
The new law is basically a timeline that insists the SEC and CFTC find out what happened, how HFT was involved and do it within 60 days.
It’s significant because the Senators presupposed that HFT was the root of the market crash. We don’t really know what happened yet.
Also, Kaufman is big on high frequency trading but his last proposal was generally friendly. Now he’s serious. Especially in this section, which proposes an option for a industry-wide pre-trade operational risk controls that, depending on their nature, could destroy HFT in the name of minimising the incidence and magnitude of any trading errors.
A couple of months ago, Kaufman’s proposal didn’t come down so hard, it was more of a learning tool that urged the SEC to “tag” traders over a certain volume threshold and collect the data.
The SEC later unanimously approved his proposal and the trading community generally thought the new regulation was a good one.
People were kind of freaking out about it today so it’s the perfect day to announce a war on HFT.
The Senators’ proposal is basically putting the blame on HFT traders and saying, now we have to clean up after the mess you made.
Here’s the Press Release:
WASHINGTON, DC — Senators Ted Kaufman (D-DE) and Mark Warner (D-VA) on Friday proposed an addition to the Senate’s Wall Street reform bill that would direct the Securities and Exchange Commission and the Commodity Futures Trading Commission to report to Congress on several key issues surrounding the May 6, 2010 market meltdown, which sent the Dow Jones Industrial Average tumbling dramatically in minutes. High-frequency-trading algorithms have been the initial focus of questions concerning the collapse.
“A temporary $1 trillion drop in market value is an unacceptable consequence of a software glitch,” said Kaufman and Warner in a joint letter to Senate Banking Committee Chairman Chris Dodd (D-CT), requesting that their directive to the SEC and CFTC be inserted into the Manager’s Amendment of the Wall Street reform bill. “We are concerned that as markets rely on and entrust such a high percentage of the capital management of the market to black-box trading systems that systemic problems may be created,” added the two Senators.
The Kaufman-Warner addition would direct the SEC and CFTC to report to Congress within 60 days of the enactment of the Wall Street reform bill the following:
o The causes of the May 6 market dive;
o How the SEC can evaluate whether the proprietary trading activities of major banks employ algorithmic trading practices that represent potential systemic risks to the markets;
o The potential need for industry-wide pre-trade operational risk controls that would minimize the incidence and magnitude of any trading errors;
o How the agencies can gain analytical assistance from academics and private analytic firms under controlled conditions to conduct analyses on whether certain algorithmic trading strategies are harmful to the interests of long-term investors; and
o How the agencies intend to “tag” high frequency traders over a certain volume threshold and use the data collected to gain a better baseline understanding about high frequency trading activities
The Kaufman-Warner addition would also direct the SEC and CFTC to report to Congress within 180 days on the following:
o Whether the agencies should insist on “shock absorber” or circuit breaker mechanisms to prevent computer-driven trading from running amok without the intervention of human judgment;
o How the agencies intend to “tag” high frequency traders and use data collected about high frequency trading activities, along with a consolidated audit trail, to detect any manipulative trading strategies; and
o Whether certain electronic liquidity providers which are currently unregulated but purport to be acting like market makers should be required to maintain “fair and orderly markets.”