By Peter Schroeder - 04/29/14 01:24 PM EDT
The head of the Securities and Exchange Commission on Tuesday pushed back against a new book that claims the financial markets are “rigged” by high-frequency traders.
“The markets are not rigged,” SEC Chairwoman Mary Jo White told the House Financial Services Committee. "The U.S. markets are the strongest and most reliable in the world."
White assured lawmakers that high-tech trading practices are not giving investors an unfair edge, and said the SEC is closely examining the trades for potential problems.
The practice of high-frequency trading, which allows people to invest millions of dollars in fractions of a second, has come under fresh scrutiny thanks to a new book from author Michael Lewis. He claims in Flash Boys that the stock market is rigged against average investors because high-speed traders can maneuver around their orders.
“The insiders are able to move faster than you,” Lewis told “60 Minutes” earlier this month.
The SEC, the Justice Department and New York prosecutors have all said they are examining the practice for potential illegal activity.
While those probes are ongoing, White defended the current market arrangement, saying that technological advances appear to be benefiting retail investors rather than hurting them.
“I want to be very clear. The market metrics suggest that the retail investor is really very well served by the current market structure,” she said.
Lewis’s claims clearly caught the attention of lawmakers. Several of them pressed White on the issues such trading technology might present, and whether average people can expect a fair shake when investing on their own.
“I know people now who don’t want to trade in the markets because of high-frequency trading,” said Rep. Carolyn Maloney (D-N.Y.).
“When you say the market’s not rigged, I just have to say there seems to be a definite advantage,” added Rep. Stephen Lynch (D-Mass.).
White said the SEC is looking intently at high-frequency trading for any potential issues but defended the market as one that is fundamentally fair for all investors. Still, she said the perception that the markets are unfair could become a problem.
“It’s something that I think we have to be very cognizant of,” she said.
The debate on high-frequency trading takes place amid a broader oversight hearing of the SEC. White pushed for a funding boost for her agency, saying that a host of new responsibilities brought on by the Dodd-Frank financial reform law and the Jumpstart Our Business Startups (JOBS) Act require more resources.
In her prepared testimony, White said she only had the resources to examine 9 percent of registered investment advisers in fiscal 2013, and now has about eight examiners per trillion dollars in assets managed by investment advisers.
“More coverage is plainly needed,” she said.
She said a boost in SEC funding would not affect the deficit, because the regulator pays for itself by assessing fees on the industry.
But Republicans remained reluctant to approve a higher funding level for the agency, noting that it has grown significantly in the last several years.
Chairman Jeb Hensarling (R-Texas) said the agency’s budget has climbed 300 percent since 2000.
“Not many other agencies throughout the entirety of the federal government have seen such hefty budget increases during this same period of time,” he said.