SEC Eyes Level Playing Field
Traders Magazine, December 2012
With exchanges and operators of alternative trading systems each trooping to Washington this year to complain about the unfair competitive advantages held by the other, Securities and Exchange Commissioner Daniel Gallagher weighed in on the issue recently.
Speaking at an industry conference last month, Gallagher said the time may have come to put brokers and exchanges on equal regulatory footing. Rather than take one side over the other, the commissioner contends that both exchanges and the brokers that compete with them may be at a disadvantage due to the exchanges' special regulatory status.
"Each market participant has its own set of costs and benefits," Gallagher said during an online market structure conference sponsored by the Investment Company Institute last month. "The SEC needs to step back and take a look at them all and decide if we should be leveling the playing field."
In June, two prominent industry leaders-one from an exchange and the other from a large brokerage-testified at a congressional hearing in Washington that legislators and regulators needed to do just that: "level the playing field." That way they could more effectively compete with one another.
Duncan Niederauer, chief executive of NYSE Euronext, told the House Committee on Financial Services that policymakers should either lighten exchanges' regulatory burden or increase that of their competitors, the brokers' alternative trading systems. Specifically, he wants quicker approval of rule filings, a loosening of exchange fair access rules and for ATSs to be regulated like exchanges.
Brokers, at this point, have no similar self-regulatory requirement to police the members of their alternative trading systems.
Dan Mathisson, head of U.S. equity trading at Credit Suisse, operator of the largest ATS, told congressional leaders at the hearing that Washington should either strip the exchanges of their self-regulatory status or scrap the policy that bars broker-dealers from owning more than 20 percent of an exchange. That way brokers would have an incentive to convert their ATSs into exchanges and compete on equal terms with the existing exchanges.
For his part, Gallagher agreed that something needs to be done. Gallagher wants the SEC to determine whether certain aspects of the Securities Exchange Act of 1934 should be amended or scrapped. The act gave exchanges regulatory powers over their broker-dealer members and is also the basis for their regulation by the SEC.
In particular, Gallagher questioned Section 19-b of the act, which requires exchanges to file rule changes with the SEC, and Section 6, which requires them to police their members.
Gallagher suggested that some parts of the Exchange Act, such as Section 6, make no sense in today's world, where trading is done not by members on a single trading floor, but electronically across several marketplaces in multiple locations.
The Republican commissioner pointed out that the nature of exchanges has changed significantly since 1975, when the Exchange Act was last amended. Exchanges have transformed themselves over the past 37 years from nonprofit, mutual organizations into profit-seeking, public companies. Yet they are still treated as quasi-governmental entities.
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