In an era of high-speed trading, where milliseconds can determine profit margins, the pace of crafting and implementing federal regulations is often measured in months or even years. For Sen. Carl Levin, the Michigan Democrat who’s retiring at the end of the year, that lag time is unacceptable. And a profitable part of Wall Street might be restructured as a result.
Levin is fighting on what might be his final battlefront on financial oversight as the chairman of the Senate Homeland Security and Government Affairs Permanent Subcommittee on Investigations, where he has often put pressure on both financial firms and regulatory agencies in an effort to restore consumer and investor confidence in the U.S. financial system.
The high-speed trading that takes place in private venues known as dark pools, made famous by Michael Lewis’s book “Flash Boys,” is his latest target. While much attention has been paid to the physical location of the computer servers used for such trades, Levin instead is focusing on a fee structure where exchanges pay certain traders for their business while charging other traders. He said the practice can at times represent a conflict of interest that doesn’t serve the best interest of consumers and erodes confidence in the marketplace.
“There are steps which must be taken, either by regulators or by Congress, to deal with conflicts and to deal with the other kinds of problems that exist in the current market because it’s clear there can be improvements,” Levin said at a June 17 subcommittee hearing. “Hopefully the regulatory agencies are going to take action. Hopefully they won’t take as long as they take on a whole lot of other things that just fester at the regulatory agency for years. And I think there may be also a role for Congress.”
But the clock is ticking.
While there are still six months left before the calendar year is up, the number of legislative days is much smaller. Even with the possibility of a lame-duck session, Congress will be in recess during August, and the House will be out for most of October to allow representatives to campaign for the midterm elections, making movement on any Senate-passed bills more difficult than it already is.
Even swift congressional action, though, would require a rulemaking process by financial regulators, meaning Levin would likely be seeing the fruits of his labor from his retirement and without the bully pulpit of his subcommittee chairmanship.
Levin has played a leading congressional role in naming and shaming members of the Wall Street community viewed by many as contributors to the financial crisis of 2008. He also hasn’t hesitated to chastise federal regulators.
“Four years after the law went on the books, the SEC still hasn’t finalized rules to stop financial firms from betting against their clients, ensure swap dealers have adequate capital, or cure the conflicts of interest undermining the reliability of credit ratings,” Levin said on June 12. “The SEC needs to stop procrastinating and get the job done.”
Levin’s criticisms aren’t without merit. Of the 280 Dodd-Frank rulemaking deadlines that have passed, regulators missed 127 of them, according to a June 2 report by Davis Polk & Wardwell LLP, which publishes a monthly progress report on the law’s implementation. The SEC has missed 41 deadlines, compared with 36 missed by bank regulators and nine by the Commodity Futures Trading Commission, said the report, which noted that “rulemaking counts are based on estimates and require judgment.”
The Dodd-Frank bill was signed into law by President Barack Obama in July 2010.
On June 5, SEC chairman Mary Jo White said her agency would work with the Financial Industry Regulatory Authority, to increase transparency in the so-called dark pools where high-speed trading can take place.
“Transparency has long been a hallmark of the U.S. securities markets, and I am concerned by the lack of it in these dark venues,” White said in a speech. “Transparency is one of the primary tools used by investors to protect their own interests, yet investors know very little about many trading venues that handle their orders.”
But that statement didn’t keep Levin from taking matters into his own hands. Four days later, he announced that his subcommittee would take its own look at the matter.
While Republicans such as Sen. John McCain (R-Ariz.), the ranking member of the investigations subcommittee, share some of Levin’s criticisms regarding high-speed trading, the hearing drew some skepticism from fellow GOP senator Ron Johnson of Wisconsin. He argued that the cost and ease of trading have both improved over the last two decades, in part because of technological advances, and that the fees exchanging hands as a result of flash trades are relatively small.
That kind of resistance signals an uphill battle for legislating any changes to the status quo. But that isn’t likely to quell Levin’s efforts, according to some experts who view the focus on high-speed trading as consistent with the lawmaker’s priorities during his 35 years in the Senate.
“Carl Levin’s focus has been primarily on the cost and consequences for the average citizen and whether the downside could have negative consequences for consumers,” said Michael Traugott, a professor of communication studies and political science at the University of Michigan. “I see the focus on the speed trading as a continuation of this. It wouldn’t take very much by way of hearings to produce legislation, and maybe that’s where he’s trying to go in the last six months of his term.”