U.S. Senator Charles Schumer, responding to concerns that high-frequency traders abandoned markets during the May 6 plunge, said more financial firms should face a legal obligation to buy or sell shares.
Computer-driven traders who “effectively” make markets for at least 25 stocks should be required to provide liquidity, Schumer, a New York Democrat, wrote in a letter today to Securities and Exchange Commission Chairman Mary Schapiro. Such an obligation would help prevent future plunges, he said.
“During the May 6 flash crash, many high-frequency traders pulled out during the freefall, leaving a dearth of liquidity and exacerbating market volatility,” Schumer wrote. “This disappearance of high-frequency traders and their withdrawal of liquidity reveal a serious problem with our market regulation.”
A preliminary report published by the SEC and Commodity Futures Trading Commission in May, responding to a market plunge that temporarily erased $862 billion in value, found that liquidity dried up when it was needed most. Schapiro has told lawmakers the SEC is reviewing whether electronic traders who make markets should have obligations to support prices.
The SEC should update its definition for “bona fide market makers” and bolster obligations for providing best prices, spreads and quotes at multiple prices based on a stock’s volume and other characteristics, Schumer wrote. While many of the rules are in place at the New York Stock Exchange, not all venues designate market makers or impose such burdens, he said.
Schumer said the measures move would effectively eliminate stub quotes, which brokers use to fulfill obligations of offering a price at which they will buy or sell stock. When some stub quotes were triggered May 6, stocks traded for pennies. Schapiro said at a meeting in Washington today that the SEC may ban stub quotes.
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