Kevin McCoy

USA TODAY

Increased complexity, inadequate transparency and conflicts of interest have created an uneven playing field for investors who trade U.S. stocks, a critic of high-speed trading told a Senate panel Tuesday.

Bradley Katsuyama, head of an alternative trading venue aimed at restoring market fairness, told the Senate Permanent Subcommittee on Investigations that the problems undercut technology advances that make trading faster and cheaper.

"We've discovered that investors are systematically disadvantaged in the way that the markets have been set up," said Katsuyama, who was featured in Flash Boys, the recently published book in which author Michael Lewis argued U.S. stock markets are "rigged."

Katsuyama avoided using that word, despite his other critical comments. He was one of six witnesses who testified at the hearing, convened to address growing public concern that high-speed trading and other advances have created problems along with gains.

"We are in an era of high-speed trading. I am troubled, as are many, by some of its hallmarks," said Sen. Carl Levin, D-Mich., the panel's chairman. He cited:

Market instability, including the 2010 "flash crash" that sent the Dow Jones industrial average boomeranging down nearly 1,000 points and back up in minutes and several subsequent disruptions that disrupted or halted trading.

Co-location, the practice in which high-speed traders gain crucial milliseconds of trading-time advantage by placing their computer servers as close as possible to comparable servers of stock markets and other trading venues.

Conflicts of interest, such as certain fees that stock exchanges and alternative venues pay brokers to execute transactions on their trading platforms. The venues with the best fees may not provide the best trade execution for an investor.

Those fees, known as "maker-taker" payments, create "an apparent conflict of interest for the stockbrokers who must choose between sending their clients' orders to exchanges offering a high rebate or the exchanges that would fill the order as quickly as possible," said Sen. John McCain, R-Ariz., the subcommittee's ranking minority member.

TD Ameritrade received approximately $80 million in "maker" rebates last year, testified Steven Quirk, trading group senior vice president of the discount brokerage.

Levin asked Quirk if TD Ameritrade "virtually always" routed investment customers' trading orders "to the exchanges that paid you the most."

"Virtually," said Quirk.

Katsuyama, the CEO of IEX Group, said his trading venue tries to eliminate disparities, in part by not paying special broker fees. IEX also uses technology to build in trading delays in an effort to ensure that all investors are able to receive and trade on market data on equal footing with high-speed traders.

New York Stock Exchange President Thomas Farley testified that he's seeking industry support to eliminate "maker-taker" payments and other fees.

"Broad adoption of this policy would reduce the conflicts inherent in such pricing schema and further reduce complexity through fewer order types and fewer venues," Farley said in written testimony submitted at the hearing.

Joe Ratterman, CEO of alternative trading venue BATS Global Markets, agreed that U.S. trading markets "are not perfect." But, echoing recent comments by Mary Jo White, chair of the Securities and Exchange Commission, Ratterman said the markets are neither broken nor "rigged."

Instead, he said the U.S. equity market "is widely considered to be the most liquid, transparent, efficient and competitive financial market in the world."

Modern Markets Initiative, an advocacy group formed by high-speed trading firms, echoed Ratterman's view after weighing some of the hearing's testimony.

"Though the witnesses have different perspectives on how to improve financial markets, they all agree technology has greatly benefited today's modern investor and the benefits of high-frequency trading should be preserved," the organization said.