(Bloomberg) — Critics should better frame whats wrong with the U.S. stock market before offering solutions to fix it, according to a senior official at the Securities and Exchange Commission.
That so many proposals have been proffered in the last two months by exchanges trying to revamp trading shows theres no clear idea of what theyre trying to solve, Gregg Berman, one of the SECs top advisers on electronic markets, said Tuesday at an Investment Company Institute conference in New York.
The reason why they probably have different ways of addressing the problem is that no ones actually defined the problem, he said. People are coming up with solutions without actually defining the problem itself.
Bats Global Markets Inc., Nasdaq OMX Group Inc. and NYSE Group have in recent months suggested rule changes to the $24 trillion U.S. stock market, aimed at everything from altering how brokers are compensated to tweaking the role of dark pools. Rather than offering divergent plans, Berman said, they wouldve been better off finding out what investors actually want.
What are those things that from a buy-side standpoint you would consider being a positive aspect of the market or the negative aspect of the market? he said.
A person familiar with the situation said in December that the New York Stock Exchanges owner, Intercontinental Exchange Inc., was working to marshal Wall Street support for a plan that would overhaul features of trading. A draft proposal circulated by NYSE among investors and brokers included curbs to keep most trades off private venues such as dark pools and agreements by exchanges to cut trading fees and stop an incentive system known as maker-taker, in which exchanges pay rebates to traders that provide liquidity.
Industry Savings
In January, Bats published a letter that suggested a reduction in fees for buying and selling some stocks could produce industry savings exceeding $850 million for the most- active shares. The Bats plan would cut fees in some securities depending on the amount of volume. Unlike NYSE, Bats wants to maintain maker-taker.
The Lenexa, Kansas-based company also said there should be a review of how brokers report where they send stock orders and what standards they use in making those decisions.
Meanwhile, Nasdaq this month started a test that dramatically cut trading fees in 14 stocks to see if it altered where brokers sent their orders. One argument for dark pools is that fees on public exchange, usually about 30 cents per 100 shares traded, are several times higher.
Whats the Issue?
What is the issue that youre actually trying to solve, asked Berman of the efforts. And then we can think about experiments and look at those types of things.
Berman added that he wasnt persuaded by evidence that a rule that pushed most trading away from dark pools on to exchanges is necessary. Referring to studies of Canada and Australia, where such limits already exist, he said there are very, very mixed results in that, and very weak results in that.
That weak evidence isnt enough to provide guidance for how the U.S. should develop, Berman added.
You should look at that jurisdiction and say, what was the actual net outcome to investors in that market? he said. And I dont think the results point you one way or another, he added. Unfortunately, were still on our own in figuring out what the criteria should be in the U.S.
