[Congressional Record (Bound Edition), Volume 156 (2010), Part 11]
[Senate]
[Pages 15263-15264]
[From the U.S. Government Publishing Office, www.gpo.gov]




                      RESTORING MARKET CREDIBILITY

  Mr. KAUFMAN. Mr. President, I rise to discuss the need of the 
Securities

[[Page 15264]]

and Exchange Commission to take meaningful action to protect the 
credibility of our markets.
  As my colleagues know, I believe deeply in the importance of our 
capital markets to America's future economic success and the ability of 
Americans to invest for their retirement years. I have said many times 
on this floor that democracy and our capital markets are the 
fundamental pillars that make America great. I have always maintained 
that if we do not have credible markets, our country will be in serious 
trouble. Credible capital markets are one of America's crown jewels and 
we should protect them as such.
  I am deeply concerned about the state of our equity markets. Many 
rapid and dramatic developments have inextricably changed the way 
stocks are traded in today's marketplace. The markets have become 
fragmented and dominated by high-frequency trading.
  These changes came to a head on May 6 when stock prices spiraled out 
of control, ultimately dropping and recovering over 500 points during a 
dizzying 20-minute time period.
  It is clear we must rely more than ever on our regulators to protect 
the integrity and credibility of our capital markets. Without a doubt, 
the SEC--the Securities and Exchange Commission--along with the 
Commodity Futures Trading Commission--CFTC--has worked heroically to 
study the flash crash and put circuit breakers in place to prevent 
another event of the magnitude we witnessed on May 6 from occurring, or 
even more. But that is not anywhere--nowhere even close--to enough.
  As Chairman Mary Schapiro has repeatedly stated, our markets exist to 
perform two principal functions: capital formation so that companies 
can raise capital and invest, create jobs and grow; and attracting and 
serving long-term investors to help facilitate that process. The May 6 
flash crash revealed structural flaws in our market structure that must 
be addressed--must be addressed--in order to ensure our markets are 
performing their best and highest purposes.
  There are many questions that remain unanswered and many solutions 
that I hope the SEC already has been exploring. More and more market 
participants and regulators are sharing their own concerns about the 
overall performance of our equity markets.
  Michael Cembalest, the chief investment officer of J.P. Morgan's 
private banking division, wrote a commentary on July 13. This is J.P. 
Morgan. Mr. Cembalest outlined several areas of current market 
structure, including the market's increasing reliance on volume driven 
by high-frequency traders, which merit careful review.
  In addition to supporting circuit breakers, Mr. Cembalest suggested 
that high-frequency traders should: ``be required to register as 
broker-dealers . . . [and] act more like the floor specialists they're 
replacing.''
  Cembalest also noted that while high-frequency volume has ostensibly 
made trading cheaper by narrowing the spreads investors often pay to 
get their orders filled, there are other costs associated with trading 
that might be less obvious. One such cost, according to Cembalest, 
occurs when high-frequency traders ``spray the tape'' with thousands of 
quotes to ``ferret out'' the intentions of large investors, and then 
trade ahead of their order flow.
  A draft report submitted by a British member of the European 
Parliament to the Committee on Economic and Monetary Affairs expresses 
similar concerns. The report, which could influence the European 
Union's ongoing review of market structure, states ``limiting systemic 
risk must be prioritized.'' Accordingly, it proposes that all trading 
platforms should ``stress-test their technology and surveillance 
systems.'' It also called for ``an examination of the costs and 
benefits of high frequency trading on markets and its impact upon other 
market users. . . .'' Finally, the report calls for ``the regulation of 
firms that pursue high frequency trading strategies to ensure that they 
have robust systems and controls with ongoing regulatory reviews of the 
algorithms they use.''
  While I stated many of these concerns last August 21 in a letter to 
Chair Schapiro, it has taken almost a year later--and in large part due 
to the May 6 flash crash--that these ideas have finally gone mainstream 
and people are talking about it in all the different areas of the news 
media. Although the task before us is daunting, as even tweaking the 
market's structure is rife with potential unintended consequences, the 
SEC must act to protect investors and restore market credibility in the 
coming months. Navigating these issues will be difficult, particularly 
with so many business models based, or even dependent, on the existing 
regulatory framework.
  Another challenge comes in the form of the recently enacted Dodd-
Frank Wall Street Reform and Consumer Protection Act which places a 
raft of new responsibilities, including 95 rulemakings and 22 studies, 
on the Securities and Exchange Commission. Nevertheless, the SEC must 
triage its responsibilities and work expeditiously to adopt much needed 
reforms in the market structure area. There can be no back burner when 
it comes to resolving a broken market structure. There can be no delay 
when long-term investors are losing confidence. The time for action is 
now.
  The direction the Commission takes in its bid to fulfill its mission 
will say much about the type of country in which we live. As difficult 
as it might be, regulators must stand apart from the industries they 
regulate, listening and understanding industry's point of view, but 
doing so at arm's length and with a clear conviction that on balance, 
our capital markets exist for the greater good of all Americans.
  This is a test of whether the Commission is just a ``regulator by 
consensus,'' which only moves forward when it finds solutions favored 
by large constituencies on Wall Street, or if it indeed exists to serve 
a broader mission and therefore will act decisively to ensure the 
markets perform their two primary functions of facilitating capital 
formation and serving the interests of long-term investors.
  A consensus regulator may tinker here and there on the margins, adopt 
patches when the markets spring a leak, and reach for low-hanging fruit 
when Wall Street itself reaches a consensus about permissible changes. 
In these times, however, the Commission must be bold and move forward. 
The American people deserve no less.
  Mr. President, I yield the floor.
  The PRESIDING OFFICER. The Senator from North Dakota.

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