It looks like the SEC is beginning to take a much stronger and more pro-investor stance in the wake of several recent financial scandals. Last Thursday, the agency took two important steps towards protecting David and slaying Goliath.
First, they proposed to put an end to flash trading. I applaud this move! If you remember, I wrote about it back in July and was very critical of the practice which basically gives exchange and ECN members a chance to see, and act upon, trades before the general public can. The practice undermines YOU, the retail investor and is wrong on every level. Check out my blog High Frequency Trading - Wall Street Evil or Just Smart Traders? to read more about it. For the reasons I laid out in the blog, I believe flash trading gives an unfair advantage to big banks and investment banks. I'm really happy to see that the SEC is taking this loophole seriously and proposing to do something about it.
Second, the SEC is attempting to restore the integrity of credit ratings by tightening regulations governing credit agencies such as Moody's and Standard and Poor's. This move is important because investors rely on these ratings. The credit rating agencies have recently been criticized for giving toxic mortgage back securities their highest honor—a AAA rating—even though the underlying home loans were of much lower credit quality. People trusted the ratings and ended up in much riskier portfolios than they bargained for. As SEC Chairwoman Mary Schapiro said:
"These proposals are needed because investors often consider ratings when evaluating whether to purchase or sell a particular security…That reliance did not serve them well over the last several years, and it is incumbent upon us to do all that we can to improve the reliability and integrity of the ratings process and give investors the appropriate context for evaluating whether ratings deserve their trust."
The new regulations aim to improve the quality of credit ratings by addressing conflicts of interest, opening the door to healthy competition and promoting accountability and transparency. Hopefully this will lead to ratings that we, the individual investor, can trust.
So it looks like Schapiro is cleaning up shop and I must say I'm happy to see her taking such decisive action towards protecting investors.
As I've said time and again, Zecco is all about the democratization of the investing world and I therefore applaud anyone who closes unfair loopholes and goes after companies providing inflated credit ratings.
So I ask you, do you pay attention to credit company ratings when trading? Have you ever been mislead or have you found the agencies to be reliable? Give me your thoughts on this or on flash trading in the comments below!
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