[Congressional Record (Bound Edition), Volume 160 (2014), Part 4]
[Senate]
[Page 5162]
[From the U.S. Government Publishing Office, www.gpo.gov]




                         HIGH-FREQUENCY TRADING

  Mr. McCAIN. Mr. President, after the financial crisis in 2008, its 
root causes and the resulting taxpayer-funded bailout; increasingly 
opaque trading activities that now dominate all stock-trading volume in 
the U.S.; a string of high-profile convictions of hedge-fund managers 
and equity analysts; and global settlements with investment banks 
involving every assortment of ``whale'' and dodgy tax-avoidance scheme, 
many Americans are now of the view that Wall Street is no longer a 
vehicle for the creation of investment capital or a reliable engine of 
entrepreneurialism and economic growth that it has become the province 
of high-frequency and automated traders. As billionaire investor and 
longtime HFT critic Mark Cuban admonished a few years ago, it has 
become a platform to be exploited by every technological and 
intellectual means possible by whoever can afford them.
  At least that is the perception.
  It is exactly that perception that has fueled major public concern 
about revelations contained in Michael Lewis' new book, ``Flash Boys: A 
Wall Street Revolt''. Lewis's book tells the story of the computer-
driven world of high-frequency trading, HFT, co-location and customized 
data. Indeed, Lewis' narrative appears to have struck a raw nerve among 
consumers, by confirming a latent belief and skepticism that Wall 
Street is indeed an insider's game and that the public's best interests 
are, at most, an afterthought.
  If true, Lewis' claim that the market is rigged through variations of 
HFT could potentially affect everyone from institutional investors to 
any individual who pays into a pension or mutual fund.
  On HFT, one big issue is: how fair is it for certain firms to line 
their trading systems up with data centers used by exchanges to let 
them shave-off millionths of a second from every transaction, front-run 
the market, drive-up prices and profit accordingly, at the expense of 
average investors who do not enjoy that same capability. Another is: to 
what extent does HFT and so-called quick-draw trading expose the market 
to undue risk-taking and potential instability like the 2010 ``flash 
crash'', in which the Dow Jones dropped 9% in 20 minutes, temporarily 
erasing $1 trillion in market value?
  These are questions that must be taken seriously by policymakers; 
regulators; and, where warranted, law enforcement officials. Indeed, 
the Commodities Futures Trading Commission, CFTC, is rightly examining 
arrangements between HFT firms and exchanges to determine whether 
insiders are receiving competitive perks, such as reduced rates, that 
could harm smaller investors. The Securities and Exchange Commission, 
SEC, is similarly looking into potentially improper relationships 
between exchanges and HFT firms. New York Attorney General Eric 
Schneiderman has labeled certain pernicious HFT practices as ``Insider 
Trading 2.0'' and launched investigations into practices such as co-
location, which permits trading firms to be geographically advantaged 
over competitors, and other arrangements that permit early access to 
market-moving information. Just yesterday, the Federal Bureau of 
Investigation, FBI, disclosed that it was also looking into related 
matters.
  Congress, as well as regulators at the SEC and CFTC should fully 
investigate these issues and pursue proposals that can minimize 
systemic risk and bolster trust in our markets. But we cannot ignore 
the inherent limitations that exist in regulating an issue as complex 
as HFT. The technology and resources readily available to trading firms 
easily dwarf those available to our government's primary regulators. 
High-frequency traders have huge incentives to gain even the slightest 
edge through speed and technology because the pay-offs can be 
exorbitant. For example, a company called Spread Networks reportedly 
spent $300 million to lay a fiber-optic cable between Chicago and New 
Jersey to increase the time it took for information to make it from the 
futures market to the exchanges by 3 milliseconds. That amount nearly 
matches the entire operating budget of the CFTC for 2013. Policymakers, 
therefore, face an uphill battle in which regulatory fixes quickly 
become obsolete as the trading firms' approaches and algorithms adapt 
almost as rapidly as information travels on their fiber-optic cables.
  Against this backdrop, industry must see for itself an opportunity to 
self-regulate. Rather than hide behind self-serving, arcane arguments 
that support a status quo that allows for front-running and other 
unethical trading practices, industry must gather-around strong self-
imposed, market-based solutions to the uncertainty and potential harm 
created by HFT that ensure fundamental fairness and transparency in 
markets that are technologically evolving at break-neck speed. Indeed, 
industry can either sit back and wait for regulators or Congress to 
address these issues with a possibly detrimental outcome for all 
concerned, or it can be proactive in developing meaningful approaches 
that not only address the instant problem but also help restore much-
needed, long-overdue confidence in the integrity of the financial 
markets.
  Some leaders in industry have recently expressed support for reforms 
aimed at minimizing unfairness that stems from the ``fragmentation and 
complexity'' of trading. But more needs to be done: key exchanges, 
trading firms, investors, banks, and self-regulatory bodies such as the 
Financial Industry Regulatory Authority, FINRA, should explore 
potential solutions that would ensure technology is employed in a way 
that encourages competition and innovation, while also increasing the 
transparency and integrity of the markets.
  Congress should keep a watchful eye on developments in this field--I 
certainly will. Federal regulators and law enforcement should continue 
to hold accountable those actors and institutions that cross the line 
into illegality, market-manipulation, and acting on non-public 
information. Whatever policy solutions are pursued, they must both 
enhance the functionality of the market and restore public trust and 
confidence in Wall Street. Industry, specifically traders and 
exchanges, must focus on cooperation instead of clamoring for speed in 
a race to the bottom, which would only leave investors in the dust and 
force consumers to shoulder the burden of another financial crisis.

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