The Securities and Exchange Commission (SEC) has been urged to conduct a comprehensive review of market structure by US Senator Ted Kaufman, who warns that practices such as algorithmic trading and the use of dark pools may erode investor confidence.
In a letter to SEC chairman Mary Schapiro, Kaufman calls for an independent "zero-based regulatory review" of a broad range of market structure issues before "piecemeal changes" make matters worse.
He suggests conflicts of interest are leading to failures to protect retail investor orders from strategies deployed by high frequency traders.
The senator also claims that rules meant to strengthen public order display instead have led to the proliferation of dark pools. Rules have spurred competition with the exchanges, leading to 50 or more execution venues, says Kaufman.
"This has led to increased competition for market share, however, that now includes questionable practices such as liquidity rebates, flash order offerings, co-location of servers and other inducement arrangements with broker-dealers and other market participants," says the letter.
Kaufman says flash orders should be banned while high frequency trading strategies that take advantage of market structure latencies should be "subjected to a searching examination" and in some cases possibly prohibited.
Liquidity rebates should be reconsidered, co-location of servers at execution venues should be regulated by the SEC to ensure "fair access" and that auditing of execution at all market centres should be uniform and improved.
"For the markets to have credibility and investors to have confidence, the SEC must act urgently to restore a level playing field for investors," concludes the senator.
The SEC has already moved to outlaw flash trading as part of a wider look at dark pools and high-frequency trading following an intervention from another senator, Charles Schumer.