Safe you Finance

WASHINGTON — Regulators on Thursday proposed rules designed to stem conflicts of interest and provide more transparency for credit rating companies. They also proposed banning "flash orders," which give some traders a split-second edge in buying or selling stocks.

The credit rating industry was widely faulted for its role in the subprime mortgage debacle and the financial crisis. The five members of the Securities and Exchange Commission voted at a public meeting to propose rules that could reshape an industry dominated by three firms: Standard & Poor’s, Moody’s Investors Service and Fitch Ratings. Their practices would be opened wider to public view and subject to some restraints.

One SEC proposal discussed Thursday is intended to bar companies from "shopping" for favorable ratings of their securities. In addition, the agencies would have to publicly disclose every entity that paid for a credit rating. They also would have to provide more information about income earned from companies they rate.

The credit rating agencies have been criticized for failing to identify risks in securities backed by subprime mortgages. They had to downgrade thousands of the securities last year as home-loan delinquencies soared and the value of those investments plummeted. The downgrades contributed to hundreds of billions in losses and writedowns at big banks and investment firms.

A more recent controversy has grown around flash orders amid questions about transparency and fairness on Wall Street.

In a flash order, a firm wishing to buy or sell stock can elect to freeze the order on an exchange for as long as half a second. Critics say flash orders give a select group of high-speed traders a window into the direction of the market, giving them the ability to trade at lightning speeds ahead of less fleet-footed investors.

Nasdaq OMX Group Inc., which operates the Nasdaq Stock Market, and the BATS exchange have voluntarily stopped using flash orders, which made up an estimated 3 percent of stock trading. The New York Stock Exchange has never used them.

Source