Senate Will Leave HFT Reform To The SEC: Sterne Agee

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Online brokers got a boost following yesterday’s testimony in front of the Senate Permanent Subcommittee on Investigations with E TRADE Financial Corporation (NASDAQ:ETFC), Charles Schwab Corp (NYSE:SCHW), and TD Ameritrade Holding Corp. (NYSE:AMTD) gaining 7.7%, 5.5%, and 4.7% respectively. While Senator Carl Levin (D, MI) had sharp words for online brokers and perceived conflicts of interest, there was nothing in the hearing to indicate immediate action on broker rebates or the maker-taker system that critics say interfere with order execution.

“Our biggest takeaway from Tuesday’s (6/17) Senate hearing was that the ball is in the SEC’s (Securities Exchange Commission) court and Congress will let the regulator perform its due diligence before forcing changes,” writes Sterne Agee analyst Jason Weyenth.

FOMC meeting may have also helped online broker stocks

Yesterday’s hearing was clearly inspired by the arguments made in Michael Lewis’s Flash Boys. Both Senator Levin’s and Senator John McCain’s (R. AZ) statement mention the book and IEX founder Brad Katsuyama was called in to testify. They made issue of broker rebates seeming to play a larger role in order execution than finding the best possible price and other conflicts of interest facing brokers, but that doesn’t mean they are ready to make specific recommendations.

The benign hearings helped online broker stocks perform yesterday, but they probably also benefited from investors buying stocks with rate exposure. Weyenth points out that Federated Investors, MetLife, and various Trust banks were all up between 2% and 4% yesterday ahead of the FOMC meeting.

Levin watching the market to see what matters

One comment that Senator Levin made during his opening statement gave an insight into how he tries to read market reactions to gauge how important certain issues really are, measuring qualitatively what’s hard to determine quantitatively.

“Earlier this year, speculation that regulators were considering restrictions on payment for order flow sent shares of some brokerage firms significantly lower. Obviously, there is a lot of money at stake in preserving these conflicts of interest,” he said.

Leaving HFT reform to SEC doesn’t mean change isn’t coming

The general change in sentiment following Flash Boys publication probably played a role as well, but Levin’s take on their dip in price seems right. So you can expect him to notice that dragging company executives in front of a Senate hearing to be grilled had the effect of giving their stock prices a boost. As Weyenth points out, leaving reform to the SEC doesn’t mean that change isn’t coming, but it probably isn’t coming soon.

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