Chuck Schumer urges slowing down trading

By Jacob Bunger
Wall Street Journal

Let's slow down the market manipulation

U.S. Sen. Charles Schumer urged federal securities regulators to explore ways to slow some high-speed trading at times of market stress and to investigate strategies that have raised concerns of stock manipulation, including one known as "quote stuffing."

The New York Democrat urged the Securities and Exchange Commission to launch a formal inquiry into whether computer-powered trading firms' rapid entering and canceling of stock orders, called quote stuffing, played a role in the so-called flash crash of May 6, and to more broadly reconsider these participants' role in the U.S. marketplace.

"While I acknowledge that technological advances, including [high frequency trading], have brought significant efficiency gains to our markets, I have come to believe that HFT provides less of the benefits to our markets than its adherents claim, and does so at greater cost to long-term investors," Mr. Schumer wrote in a letter to SEC Chairman Mary Schapiro, a draft of which was reviewed by Dow Jones.

SEC representatives weren't available for comment.

The Wall Street Journal reported last week that the SEC has begun looking into whether quote stuffing is putting some investors at a disadvantage by distorting stock prices.

Also under agency scrutiny is a practice known as "sub-penny pricing," where many orders are priced in increments as small as one-tenth of a cent and far away from the most recent price of a stock, raising fears of manipulation.

The SEC should identify firms that frequently pursue such strategies, Mr. Schumer said, and require exchanges and other trading venues to throttle back these firms' trading activity—or that of all participants—when market volatility is on the rise.

Let the quote rest at room temperature

Requiring stock quotes to stand for a set period of time would also help ensure that trading programs can't send thousands of orders if traders have no intention of executing them, he said.

Such a minimum quote lifetime has been suggested by brokerage executives in recent months, but implementing the idea is seen as difficult. Some traders have said it could create the possibility of arbitrage in related securities or derivatives markets.

The recommendations from Mr. Schumer, a senior member of the Senate Banking Committee, follow his call in August for the SEC to create additional requirements for high-speed electronic traders to keep trading in volatile markets. Several such firms that typically provide market liquidity ceased trading amid the flash cash, potentially exacerbating price swings.

Mr. Schumer's comments come as U.S. regulators prepare to deliver a report as soon as this month on the flash crash, which exposed flaws in the infrastructure of U.S. securities markets and thrust computer-driven trading into the spotlight. European regulators and exchange officials are expected to discuss the topic this week at a conference in Interlaken, Switzerland.