Senator Calls For Closer Scrutiny Of 'Flash Traders'

The stock market took a wild ride this week, but it was mild compared to what happened May 6. That's when the Dow plunged nearly 1,000 points in just a few minutes. The SEC is investigating, and one of the possible culprits is so-called "flash trading." It's when high-frequency traders buy and sell enormous numbers of stocks with the click of a button. Host Guy Raz speaks with Sen. Edward Kaufman, a Delaware Democrat who's been calling for an investigation of "flash traders" for months.

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GUY RAZ, host:

So what about the things left out of the Senate bill? One proposal was to regulate so-called flash trades. These are stock trades carried out by powerful computers, computers that in an instant can buy and sell millions of shares with a click of a mouse. Flash trades now account for well over half of all trades on Wall Street, and most of the traders aren't based anywhere near the exchanges.

The SEC is now investigating flash trading to see if it helped cause that massive thousand-point drop in the Dow earlier this month.

Since last year, Delaware senator, Ted Kaufman, has been calling for closer scrutiny of these traders.

Senator TED KAUFMAN (Democrat, Delaware): The problem we have now is this thing has grown like a gigantic weed in your backyard, where you could have cut it down and dealt with it and regulate it fairly easily when it first got going. But now, it's grown to 70 percent of the market. So basically, we just don't know what's going on.

RAZ: To what extent do you believe that the huge drop in the markets on May 6 was caused by flash trading?

Sen. KAUFMAN: I intuitively think that it was a major player. There was other things going on. I think the short selling and those types of things that we probably will never know for sure because we don't keep track of some of the data we need, which is one of my big concerns with flash trading is that we don't know what's happening in these things and we don't keep the records so we don't know contemporaneously what's going on. And after the fact, it's very difficult to reassemble what happened.

RAZ: Now, you've been calling for an investigation, obviously, of these traders. The SEC is investigating what happened on May 6 that Chairman Mary Schapiro is proposing some new rules - we don't know what they are yet - for these flash trades. Will that be enough?

Sen. KAUFMAN: No, no.

RAZ: Or should there be formal regulation?

Sen. KAUFMAN: No, and I don't think she's saying that this is enough. I think she feels that we have to do something right now and put a Band-Aid on. In September of last year, Guy, on the floor of the Senate, I said we cannot just deal with reactions to things that go bad. We have to take a look at the entire system because we have an odd look at the system and there's been this incredible growth.

Whenever you have a lot of money, and there's a lot of money in this, and you have a lot of change, and this has been a massive change from 30 to 70 percent of our trading, and you have no transparency at all on what's happening and no regulation, there's an excellent chance for a disaster, because that's exactly what happened with derivatives. The pieces are in place with this high-frequency trading, and they way we're dealing with for another meltdown of this type.

RAZ: In very simple terms, do you think that traders who can, in an instant, trade 80 million, 100 million, a billion shares and then sell them 11 seconds later, do you think that should be allowed?

Sen. KAUFMAN: I don't know. I think if it does and it provides service and provides liquidity, it's fair and it's honest, and the rest of those things, but the whole thesis I'm saying to you, Guy, is that no one knows if that's the case. I am trying to stick to the point of transparency. We have to see what is going on.

RAZ: That's Senator Ted Kaufman. He's a Democrat from Delaware.

Senator, thanks so much for joining.

Sen. KAUFMAN: Sure. Thank you, Guy.

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