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By Herbert Lash
May 6, 2011 2:49 PM EDT
Regulators are moving to lift a veil of secrecy over a key constituency on Wall Street a year after the "flash crash," but how much disclosure should be required of high-frequency traders remains an open question.
One proposal to boost market transparency, rooted in the Black Monday crash of 1987 when the Dow plunged more than 22 percent in the largest, single-day drop in U.S. history, is pending and would be a key tool for regulators.
But the creation of a large trader reporting system still has not passed a year after the idea got preliminary, unanimous approval by the Securities and Exchange Commission, which was supposed to vote again after 60 days and public comment.
A precipitous drop briefly wiped out almost $1 trillion in stock value on May 6, 2010, an unprecedented fall that was exacerbated by high-frequency traders unloading their inventory of securities at the depth of the plunge.
While those tactics did not spark the flash crash, investors and academics have warned a similar crash may occur.
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While comments have been supportive, the proposal is likely opposed by many high-frequency traders who fear workers at the SEC, despite confidentiality agreements, could reveal their trading strategies -- the lifeblood of their operations.
These strategies are at the center of a new order in markets in which anonymity is king and abusive activity can fester for a long time. That's unsettling for regulators who must monitor systemic risk, such as the unprecedented plunge last year on May 6.
"The threat is that somebody who has a proprietary system might want to hide from everybody what he's doing, and it's not appropriate to hide it from the government," said Larry Harris, a former SEC chief economist. Harris is now a Marshall School of Business finance professor at the University of Southern California in Los Angeles.
Fears the market is flawed and that the fast traders thrive on improper activities remains a concern among institutional investors, perhaps their leading critics.
The proposed rule would tag large traders with unique IDs, a move that would greatly facilitate the audit trail and give the SEC access to information on their trades.
In the fragmented marketplace that came about a decade ago with deregulation, the visibility of market activity has deteriorated, said Jim McCaughan, chief executive of Principal Global Investors LLC, the asset management arm of Principal Financial Group of Des Moines, Iowa.
Access to information is no longer equal, said McCaughan, noting that high-frequency traders are gaining access to the order book that small, private investors are not privy to.
"We do need to find ways to level up the playing field in terms of information flows," he said. "That's the key problem. That's what I'm fundamentally still not comfortable with."
CODE OF SILENCE PRIDE OF WALL STREET
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