Lawmaker says high-frequency trading creates conflicts of interest

Senate hearing focuses on rebates paid to brokers for placing trades with wholesalers and for using certain exchanges

Jun 17, 2014 @ 2:42 pm

By Mark Schoeff Jr.

hft, high speed trading, maker taker, carl levin, wall street, trading, equities, sec
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Joseph Brennan, principal and head of global equity index group at Vanguard Group Inc., criticized how some stock trades get done. (Bloomberg News)

A senior lawmaker Tuesday asserted that retail investors are hurt by the way brokers route orders to buy and sell securities.

Sen. Carl Levin, D-Mich., chairman of the Senate Permanent Subcommittee on Investigations, said retail brokers have conflicts of interest when they accept payments from wholesale brokers to place their trades with them. He also said that conflicts arise when brokers pocket rebates for placing their trades on certain exchanges, a practice known as “maker-taker.”

“The duty of lawmakers and financial regulators is to look out for the interests of investors and the wider public,” said Mr. Levin, who called the hearing to explore high-frequency trading. “There is significant evidence that these conflicts can damage retirement savings, pension holdings and other investments on which Americans rely.”

The hearing was inspired in part by Michael Lewis' recent book, “Flash Boys.” One of the subjects of that book, Bradley Katsuyama, president and chief executive of IEX Group Inc., testified that “investors are systematically disadvantaged in the way that markets are set up.”

Another witness, Thomas Farley, president of the New York Stock Exchange, said the maker-taker system should be discontinued.

It also was criticized by a mutual fund official.

“We think that maker-taker creates an appearance of conflicts of interest and adds additional complexity to the markets,” said Joseph Brennan, principal and head of the Global Equity Index Group at The Vanguard Group Inc.

Mr. Brennan and other witnesses suggested that market structure changes be tested in a pilot program. In a recent speech, Securities and Exchange Commission Chairman Mary Jo White said the agency would undertake a comprehensive market structure review.

One lawmaker downplayed the notion that high-speed trading and aspects of brokerage order placement are making trades more expensive for investors. Sen. Ron Johnson, R-Wisc., said that the financial markets have become more competitive and transparent in recent years.

“We're really talking about miniscule costs,” Mr. Johnson said. “I'm trying to figure out where the problem is here.”

Mr. Katsuyama said that the situation is worthy of Congress' attention.

“The conflicts are real,” he said. “It's a principles-based argument.”

Congress or financial regulators should address real and perceived conflicts in order to reassure investors, Mr. Levin said.

“We've got to rid our markets of conflicts of interest to the extent humanely possible, if we're going to restore confidence in our markets,” Mr. Levin said.

The ranking Republican on the committee, Sen. John McCain, R-Ariz., called for “common sense solutions,” including requiring more transparency about maker-taker payments and other broker conflicts.

Previously, Mr. Levin's panel delved into problems surrounding the sales of mortgage-backed securities.

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