The Economist. Regulating in response to the 'flash crash'

SIR – The Economist has always been a steadfast proponent of free trade, free markets and limited government. So it was with both bemusement and alarm that I read your assertion that "regulations have not kept up" with the fragmented structure and lightening speed of stockmarkets. You reasoned that because high-frequency traders were implicated by regulators in the May 6th "flash crash", the Securities and Exchange Commission's proposal for a large-trader reporting system will help it "track high-frequency trading in the future" and is justified to prevent another meltdown.

Nothing could be further from the truth. Long before the May 6th mayhem the large-trader reporting system was proposed by the SEC to "promote fairness and efficiency in the markets" by requiring that traders and firms who engage in substantial levels of trading activity reveal their identities and disclose their trades. But given the lack of evidence linking a large trader to wrongdoing, the proposal is unwarranted.

The SEC plan poses a threat to the very function of free markets. By selectively applying the rules only to large traders while other market participants remain safely cloaked, it violates the key principle that all investors should be afforded anonymity. The SEC is seeking unprecedented oversight over a single group of market participants–a group with no history of securities-law violations. The commission also will eliminate the protection of anonymity for this group, thus allowing other market participants to see exactly how, when and where they trade. All in the name of "protecting investors".

The SEC already has the authority and resources it needs to pursue and to prosecute specific and credible allegations of American securities-law violations. Unfortunately, the large-trader proposal has gained momentum in the wake of market events on May 6th. No doubt the commission hopes that the common misunderstanding linking large-traders to market irregularities will help its bid.

Allen Zaydlin
Chief executive officer
InfoReach
Chicago

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