(Adds comments from White, lawmakers)
By Sarah N. Lynch
WASHINGTON, April 29 U.S. Securities and
Exchange Commission Chair Mary Jo White flatly rejected claims
that retail investors are being fleeced by high-frequency
traders who can use their speed to jump ahead with buy and sell
orders that fetch better prices.
"The markets are not rigged," White told a U.S. House of
Representatives panel on Tuesday, in response to a blunt
question from New Jersey Republican Congressman Scott Garrett.
"The U.S. markets are the strongest and most reliable in the
world," she added.
White's comments to the House Financial Services Committee
mark the first time she has directly responded to allegations in
Michael Lewis' new book "Flash Boys: A Wall Street Revolt" since
its publication about a month ago.
In the book, Lewis claims that high-speed traders are
engaged in a form of front-running, in which the firms are able
to quickly identify an investor's desire to buy a stock, rush to
buy it first and then sell it back at a higher price.
The book has since prompted the FBI, the SEC, the U.S.
attorney general and the New York state attorney general to
disclose they are investigating potential abuses by high-speed
White reiterated on Tuesday that her agency's investigators
are actively pursuing probes into high-speed traders and dark
pools, or anonymous trading venues.
But she also sought to dispel the notion that using
high-speed technologies to trade ahead of others using stock
quotes disseminated on public data feeds could meet the legal
definition of "unlawful insider trading."
"There is some confusion about that," she said.
The SEC has long been reviewing equity market structure
issues, particularly following the May 6, 2010 flash crash
incident when the Dow Jones Industrial Average sharply plunged
before quickly rebounding.
But in recent weeks, Michael Lewis' book has re-ignited a
long-standing debate over the role of high-speed traders, and
whether they may be getting an unfair advantage over ordinary
Many Wall Street brokers and stock exchanges have lambasted
the book as a one-sided account that fails to acknowledge the
liquidity benefits that high-speed traders bring to the markets.
But others have lauded it as a breath of fresh air that they
hope will finally prod U.S. regulators to take action.
Although staff at SEC are considering whether to launch some
pilot studies to test different regulatory proposals, there are
no immediate plans to issue rules to crack down on high-speed
trading or trading in unlit markets.
White was careful not to rule out any potential regulatory
changes for U.S. equity markets, saying the agency could later
consider measures to improve market quality.
She acknowledged at one point that the market is not
"perfect" and told lawmakers that the agency's "data-driven"
review of market structure issues surrounding areas such as
order types, dark pool trading and data feeds was still ongoing.
But she also cautioned against tinkering with the rules
before understanding the potential consequences.
In one exchange with a lawmaker on the panel, she forcefully
defended the functioning of the market and rejected claims that
mom-and-pop investors are being harmed.
"I want to be very clear that the market metrics suggest
that the retail investor is ... very well-served by the current
market structure," White said.
Her cautious approach to market structure rule-making won
her praise from many Republicans on the panel.
"I believe you and your staff are approaching this ongoing
review of our equity markets in just the way you should,"
Garrett told her.
"It is critical that you and your agency do not fall into
the trap of adopting half-baked potential changes in order to
publicly respond to a sensationalized and over-hyped media
narrative," he added. "The SEC has to be the grownup in the
(Reporting by Sarah N. Lynch; Editing by Doina Chiacu and Phil