It was clear last fall that regulation was going to be a hot topic in 2009. The SEC is living up to those expectations. This month’s cover story analyzes the SEC’s next step in dark pool regulation. The top regulator is concerned that too much volume is being executed away from visible markets, which hurts transparency. There could be rule proposals and a concept release, reports Senior Editor Nina Mehta.
The plot thickens: "The scope of what the SEC is considering is radical. Robert Greifeld, CEO of Nasdaq OMX Group, has referred to the prospect of change as "Reg NMS 2." He told analysts last month: "As we go into a period of time where there’ll be renewed market structure discussions–it’ll be Reg NMS 2–we have to make sure we take a comprehensive look at what’s transpiring in the markets." Any new rules, of course, would come right on the heels of the original Reg NMS and half-a-dozen years after the move to pennies, which came after Reg ATS and the Order Handling Rules in 1997, which got the ball rolling.
In 1963, the SEC issued a Special Study of Securities Markets, one that took two years to put together. It became the blueprint for a number of changes over the next 12 years. One reason behind the study was that the SEC had been a passive regulator of exchanges during the Eisenhower years. That, to be sure, is a stark contrast to the SEC’s proactive rulemaking in equities since the mid-1990s. But beyond any new rules or concept release on dark pools, I am of the opinion that now is the time to undertake a thorough study of how electronic markets work. Clearly, the mainstream lack of understanding about how today’s equities marketplace operate was obvious during the flash order brouhaha. In fact, there were so many inaccuracies in the media on flash orders and electronic trading that I believe those comments actually hurt investor confidence. Talk about poor timing.
First, such a study would set the record straight. It is very hard to remove misinformation from the public domain in this age of viral media. Second, because such dramatic change has occurred in the way stocks trade, the SEC would be providing a public service to the investing public-both institutional and retail-in explaining more about the current equities markets. I have no idea if co-location is healthy for fair markets, or if high-frequency traders have a tremendous advantage, or even a tiny one, over other investors. If I have these questions, having covered equity trading since 1993, I’m sure thousands of investors of all stripes are wondering the same thing. An independent committee that reports to the SEC should be created. Let’s see what they come up with.
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