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June 3, 2013

A Modest Proposal

By Tom Steinert-Threlkeld

Andy Brooks just wants to get something done about the structure of equity markets.

In 2010, the Securities and Exchange Commission put out its concept release on Equity Market Structure, proposed creating a Consolidated Audit Trail of details on all stock and options transactions and started working on rules mandated by the Dodd-Frank Wall Street Reform Act. All are unfinished.

Yes, there's a ban on naked access to markets, limits on how far stock prices can move in a five-minute period and market-wide circuit breakers.


But Brooks, the head of U.S. equity trading for T. Rowe Price Group, which manages $617 billion in assets, is itching for more. Particularly as the relationship between high-speed automated trading for microsecond profit and purchases and sales made for long-term investing in mutual funds gets more complicated.

Take, for instance, the growth of off-exchange trading, which hurts the ability of public markets to determine real prices for securities. Now 35 percent of consolidated volume gets transacted off exchanges.

Driving this: To some degree, anonymity. The ability to move big blocks of stock, without rippling the market.

But, more, it's savings. Brokers can avoid paying access fees of about 30 cents per 100 shares to exchanges, if they match orders elsewhere first.

Or they can make money, by chasing the highest rebates paid by the lit exchanges.

"It would be really interesting and really fun," Brooks said on May 13 at an equity market structure roundtable in New York, if the industry tested what would happen to 50 stock symbols or so during a six-month pilot under these conditions:

* Forget rebates. No payments for order flow. Or inconsequential amounts.

* Demand price improvement. At least half the spread, in trades within a penny increment. A penny or more on larger increments.

*Require real size on trades off public exchanges. Say, 2,000 shares per trade, minimum.

Or 6,200, the number he actually used in the roundtable put on by Rep. Scott Garrett, R-N.J., and attended by several other House members, as well as SEC member Dan Gallagher.

Brooks' point: Even dark pools aren't trading in blocks. The anonymous trading, in almost all cases except that of Liquidnet, is done in the same 200- or 300-share slices that are dominating public exchanges.

So move that back onto public exchanges.

These simple steps, he contends, would make markets "come together" as well as create clear roles for market makers, stock buyers and stock sellers.

He's betting the result would be greater transparency, deeper liquidity on displayed markets and smaller intraday spreads. A trifecta in the race to improve equity markets.

"If you put all those together in a pilot, that would be a pretty interesting test case to experiment with," he said.


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