SEC chair tells House panel: 'The markets are not rigged'
A trader works on the floor of the New York Stock Exchange minutes before the closing bell on Oct. 8, 2013 in New York City. [AFP]

By Sarah N. Lynch

WASHINGTON (Reuters) - 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 traders.

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 investors.

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 room."

(Reporting by Sarah N. Lynch; Editing by Doina Chiacu and Phil Berlowitz)

[Image via Agence France-Presse]