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Monday, May 24, 2010

Regulation: Don't Throw the Baby Out With the Bathwater

Posted by John Bates


We are still feeling the repercussions of the "Flash Crash" in the markets. Both the SEC and CFTC have been trying to figure out what happened and what to do about it. Of course the Flash Crash threw salt in the open wound left open from the worst recession since the 20s -- which many still blame on greed in the Cap Markets space.

The CFTC is forming a panel to meet in July - a technology advisory committee that will hold hearings to help the agency look into issues such as co-location, swap execution facilities and high frequency trading. The first hearing is on July 14 when they will discuss high-frequency trading: read the article.

The CFTC said the committee will "discuss how technology is being developed across the industry, how the CFTC should oversee such technology, and what the future holds for technological advancements in our markets so the CFTC can stop playing catch-up, as it has for so long."

We welcome the CFTC hearings into high frequency trading. Regulators are in a tricky situation right now trying to balance populist anger against HFT firms with the need to keep our markets safe for investors. The CFTC and other regulators need to be able to police markets to prevent fraud and trading errors, while - at the same time - ensure that US markets remain competitive. We don't want to over-regulate and sacrifice business to looser regulator regimes; this would be tantamount to throwing the baby out with the bathwater.

Let's keep our economy strong. My motto with regard to regulation of trading: POLICE don't RESTRICT. But of course this means high quality policing in real-time, and this needs increased transparency and new approaches to markets surveillance across fragmented markets and real-time pre-trade risk management.

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