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Regulatory Revolving Door Raises Ethics Questions

Last week, Elizabeth King, a long-time regulator at the Securities and Exchange Commission, joined the electronic market making firm's regulatory staff, raising questions about the ethics of such a move.

Last week, Elizabeth King, a long-time regulator at the Securities and Exchange Commission, joined the electronic market making firm's regulatory staff, raising questions about the ethics of such a move.

King was an associate director of the Securities and Exchange Commission's (SEC) division of trading and markets during the Commission's ongoing review of market structure and high frequency trading issues — as a member of its regulatory affairs team, according to published reports.

This is obviously a strategic hire for GETCO as regulators are scrutinizing the activities of HFT firms and contemplating whether to add more obligations to their electronic market making activities. Hiring a former regulator can also be helpful for interpreting the new rules that may result from the review.

Sen. Ted Kaufman (D-Del.), who has been a critic of high frequency trading, blasted the move on Friday, condemning the move since King would be extremely knowledgeable about the SEC's thinking on high frequency trading, the flash crash and on the broader market structure issues under review.

Here is an excerpt from Kaufman's statement from the blog Zero

"This is another example of regulatory capture at its worst. It is one thing for Wall Street firms to hire SEC staff for their general knowledge and expertise. It is quite another, however, when the leading high frequency trading firm, Getco, reaches into the SEC's Division of Trading and Markets and hires a senior official who presumably has been close to, or perhaps substantially involved in, a major ongoing Commission review of a broad range of market structure and high frequency trading issues in the equity markets -- a review that should lead to additional rulemakings that will have a direct bearing on Getco's trading strategies. "Indeed, Getco is hiring Ms. King shortly after the May 6 ‘flash crash' and the extraordinary efforts by the SEC - presumably with Ms. King's involvement - to understand how high frequency trading may have contributed to unusual trading activity in the equity markets on that day. According to the SEC/CFTC preliminary report, ‘staff also intends to pursue a joint study to examine the linkages between correlated assets in the equities (single stocks, mutual funds and ETFs), options and futures markets. The study could partly focus on examining cross-market linkages by analyzing trading in stock index products such as equity index futures, ETFs, equity index options, and equity index OTC derivatives using, to the extent practicable, market data, special call information, and order book data.' These include areas for which Ms. King had official responsibility at the SEC.

Though Kaufman acknowledges that there is a one-year "cooling off" period in which King cannot lobby on behalf of GETCO specifically before the Commission, the senator is concerned that King can inform Getco as to the direction of future rulings and views on the ‘flash crash" and other market structure issues.

However the Financial Times points out that King was not involved in the SEC's ‘flash crash' deliberations.

Meanwhile, the FT pointed out that Ms. King spent 17 years at the SEC working under a public servant's salary, suggesting that she was motivated by a private sector salary raise.

While the "optics" of King joining the leading HFT firm is not ideal, according to the FT, it is consistent with GETCO ‘s participation of late in the recent SEC Roundtable and other conferences, explaining the nature of high frequency trading to educate and correct some of the misconceptions.

There are also other examples of the regulators accepting jobs with other firms they regulate. Why yesterday, Jim Overdahl, a former chief economist of the SEC and CFTC, became a spokesman for the FIA Principal Traders Group to represent the views of principal traders - firms that are otherwise known as proprietary traders in securities and commodities markets. Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio

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