Is The SEC Still Working For Wall Street?

A version of this story appeared on The Baseline Scenario.

The Securities and Exchange Commission (SEC) under Mary Shapiro is trying to escape a difficult legacy -- over the past two decades, the once proud agency was effectively captured by the very Wall Street firms it was supposed to regulate.

The SEC's case against Goldman Sachs may mark a return to a more effective role; certainly bringing a case against Goldman took some guts. But it is entirely possible that the Goldman matter is a one-off that lacks broader implications. And in this context the SEC's handling of concerns about "high frequency trading" (HFT) -- following the May 6 "flash crash", when the stock market essentially shut down or rebooted for 20 minutes - is most disconcerting. (See yesterday's speech by Senator Ted Kaufman on this exact issue; short summary.)

Regulatory capture begins when the regulator starts to see the world only through the eyes of the regulated. Rather than taking on board views that are critical of existing arrangements, tame regulators talk only to proponents of the status quo (or people who want even more deregulation). This seems to be what is happening with regard to HFT.