Lawmakers Spurred by Lewis Book Try to Slow Flash TradersDerek Wallbank
Democrats in Congress today will renew a long-stalled push to levy fees on high-frequency trading in an effort to generate hundreds of billions of dollars -- or tax the practice out of existence.
The move comes after Michael Lewis, author of the book “Flash Boys,” charged that the stock market is rigged against investors because of high-frequency traders with advanced computers. That sparked a national debate, prompting lawmakers to take up what just last week had been a dormant issue.
“These don’t really add any value,” Minnesota Democrat Keith Ellison, the sponsor of one such measure, said in an interview. “They’re not market signals, they’re just collecting checks because your computer’s faster than somebody else’s.”
The measure isn’t likely to move forward in the Republican-led House, where no votes have been scheduled on the issue, said Representative Peter DeFazio, a Democrat who offered separate legislation. And none of the bills introduced in the past year have picked up a single Republican cosponsor.
Still, proponents of stricter regulation said they see the debate over the book as a catalyst for future changes.
“The simplest approach and most direct approach is with a transaction tax,” said DeFazio of Oregon, whose legislation would impose what he described as a “minuscule” 3-basis-point levy on the sell side of transactions.
Tom Harkin, an Iowa Democrat, sponsored an identical bill to DeFazio’s in the Senate that also hasn’t advanced. Both measures would raise about $352 billion over 10 years.
“We set it at a level we think the market could bear, except the flash traders,” DeFazio said of his tax.
Ellison, a member of the Financial Services Committee that oversees Wall Street and trading, introduced legislation almost a year ago that would impose taxes on transactions.
His measure includes a levy that he says could dramatically reduce high-frequency trading. The bill, which gained Democratic cosponsors in the last week, would set a 0.5 percent tax on equities trades and a 0.005 percent tax on derivatives. He plans to roll it out again tomorrow.
Lawmakers also may look to boost resources for regulators at the Securities and Exchange Commission and Commodity Futures Trading Commission, as well as strengthen enforcement mechanisms in separate legislation later this year.
Lewis says the U.S. stock market is rigged when high-frequency traders with advanced computers make tens of billions of dollars by jumping in front of investors. Everyone who owns equities is victimized by the practice, in which the fastest traders figure out which stocks investors plan to buy, purchase them first and sell them back at a higher price, says Lewis, a columnist for Bloomberg View.
Guggenheim Securities LLC analyst Jaret Seiberg said there’s no political will for a transaction tax.
“Allegations that Michael Lewis raised in the promotion of his new book have put high-frequency trading in the spotlight and have left lawmakers and pundits scrambling for options to limit” the practice, Seiberg wrote in a note this week.
Part of the trouble with regulating such trading is that most members of Congress don’t understand it.
“There isn’t a great depth of knowledge among policy makers on high-frequency trading,” said Representative Patrick McHenry, a North Carolina Republican who has been involved in the issue for years. He hasn’t read the Lewis book though said he plans to soon.
High-frequency trading firms are seeking to divorce the issue of speed from the question of good and bad actors.
“We shouldn’t be lumping them together,” said Peter Nabicht, a senior adviser with Modern Markets Initiative. The industry group, which started in January, represents high-speed traders and is backed by Global Trading Systems, Hudson River Trading, Quantlab Financial LLC and Tower Research Capital LLC.
It’s still early in the process, and lawmakers will start by trying to become educated about it, McHenry said.
“It’s appropriate that we delve into the issue,” he said, adding that the Lewis book “gives this issue instant credibility.”
Senator John McCain, an Arizona Republican, said the book raises “questions that must be taken seriously by policy makers, regulators and, where warranted, law enforcement officials.”
U.S. Attorney General Eric Holder promised Congress a thorough investigation into whether high-frequency trading violates laws against insider trading.
“The Department is committed to ensuring the integrity of our financial markets -- and we are determined to follow this investigation wherever the facts and the law may lead,” Holder said in prepared remarks today for a hearing of the House Appropriations subcommittee that oversees the Justice Department.
The Federal Bureau of Investigation also is looking into the practices and has solicited traders and stock-exchange workers to blow the whistle on possible front-running and manipulation via high-speed computers.
New York Attorney General Eric Schneiderman opened an investigation last month into whether U.S. stock exchanges provide high-frequency traders with improper advantages. He’s examining the sale of products that offer faster access to data than what’s typically available to the public.
The SEC is “very much on top of” worries about high-frequency traders and automatic traders and will take a “data-driven” approach to any new rules, Chairman Mary Jo White said at an April 1 hearing.
The CFTC is reviewing futures markets to ensure high-speed trading isn’t violating the law, acting Chairman Mark Wetjen told reporters in Washington yesterday.
“I don’t have the impression at the moment that futures markets are rigged,” Wetjen said on the sidelines of a CFTC meeting.
DeFazio said significant changes may happen only “in the midst of a major overhaul of the tax code,” which isn’t likely to happen this year.
The Ellison bill is H.R. 1579. The DeFazio bill is H.R. 880 and the Harkin Senate companion is S. 410.