Commentary

Elaine Wah

Modern Markets, Modern Metrics - A Blog By IEX

In this blog by IEX's Elaine Wah, the newest public exchange looks to refute public claims that the metrics it uses are designed to inflate its own volume numbers and mislead people.

Traders Poll

Do you think it's a good idea to conduct an access fee pilot to assess the pricing models used by many trading venues?




Free Site Registration

December 14, 2009

2009 Review: Washington on the Warpath

Washington Strikes Back

By Nina Mehta

Also in this article

This past year, Washington went on the warpath against Wall Street. And it wasn't limited to over-the-counter derivatives regulation or executive compensation practices. The securities industry's market structure also became one of the bad boys making headlines around the nation, fueling a regulatory crackdown of sorts.

The U.S. Congress is, arguably, driving the agenda, with Senators Charles Schumer, D-N.Y., and Ted Kaufman, D-Del., prodding the SEC to act. In addition, market participants such as the securities exchanges are raising their voices and telling the Securities and Exchange Commission what changes they would like to see implemented in the marketplace.

The SEC is now casting a wider net over a range of practices, from short selling to flash orders and co-location strategies. Early next year, it will issue a long-awaited concept release that raises questions about how high-frequency trading and dark pools may be affecting the marketplace. This is being done as Congress stands over the SEC, cracking the whip and lashing out at dark pools and other trading features it has decided it doesn't like.

The SEC's concern is investor protection and investor confidence. One of its gauges for determining if the markets are fair and transparent is whether two-tiered markets, in which some people have access to information that others don't, are developing. SEC Chairman Mary Schapiro made clear in October that her agency is on the lookout for practices that create "a risk of private markets and two-tiered access to information." She took the SEC's reins last January, after the near-meltdown of the markets as a result of the subprime crisis.

Senators Schumer and Kaufman have excoriated Wall Street for what they see as market structure failings involving short selling, flash orders, dark pools, high-frequency trading, naked access, co-location and market surveillance. The list of woes, in their eyes, is long and attributable to weak oversight and loosey-goosey rules. They have taken turns arguing that the markets are unsafe and in need of greater oversight.

Sen. Kaufman said in a speech on the Senate floor last month that the stock market has three "deadly ingredients: rapid technological development, lack of transparency and a lack of regulation." He added that "we have no effective regulation in these markets."

Many in the trading industry think these sorts of strongly worded statements are unfair. From the CEOs of Nasdaq OMX Group and NYSE Euronext on down, they argue that the markets functioned well during the financial crisis while other asset classes froze up. The changes needed in equities, they say, are far less drastic than the grim scenarios presented as some would suggest.

Still, the SEC under Schapiro has been busy. In the trading arena, the agency proposed a series of short-selling constraints in the spring, although by early last month it still had not reached a conclusion about which course of action to pursue. The SEC worked on a sponsored-access proposal from Nasdaq, designed to reduce risks associated with broker-dealers' customers accessing market centers directly, and recently decided to create another layer of controls through a "Commission-level" rule, due out next year.