(Bloomberg) — Reducing the complexity of the U.S. stock market, where electronic orders cascade among more than 50 different venues, is the most urgent goal of any effort to reform it, trading executives said.
U.S. Securities and Exchange Commission Chair Mary Jo White unveiled plans today that would subject privately owned networks known as dark pools to more review, register proprietary firms that do high-frequency trading and explore how fairly prices are disseminated to investors. Its the agencys most ambitious plan yet to rein in a market portrayed as out of control in Michael Lewiss book Flash Boys.
The markets could be much simpler, much easier to understand, and in doing so will bring more confidence to the way they operate, said Jeff Sprecher, the chief executive officer of Intercontinental Exchange Inc., which owns the New York Stock Exchange. He spoke at the same conference in New York where White revealed her proposal. Im glad that we have an SEC thats engaged.
Whites plans were mostly welcomed by executives in an industry that was blindsided in April with investigations by the New York attorney general and Federal Bureau of Investigation. They stressed that the review should be data-driven, a buzzword that is deployed by securities professionals to distinguish deliberative reviews from more populist critiques after Lewis said the stock market is rigged.
We Applaud
If all this stuff is implemented properly and their rules are done with data in mind, it would improve market quality and market stability and it could bring more retail investors into the market, Peter Nabicht of the Modern Markets Initiative, a lobbying group for high-frequency traders, said today during a phone interview. Its members include Global Trading Systems, Hudson River Trading, Quantlab Financial and Tower Research Capital. We applaud the SECs efforts.
Four years after the flash crash and almost a decade after rules were enacted that allowed electronic traders to supplant human brokers on most exchanges, the U.S. securities industry is under pressure to prove individual investors are treated fairly. Eric T. Schneiderman, the New York attorney general, said on April 4 that new laws may be needed to regulate trading.
Schneiderman said today in a posting on his Twitter account that hes pleased to see Whites comments calling for market reforms to curb unfair advantages for HFT. High- frequency traders including Chopper Trading LLC, Jump Trading LLC and Tower Research Capital LLC were subpoenaed as part of his probe of the industry, a person familiar with the matter said in April.
Myopic Debate
High-frequency traders have faced less aggressive criticism from Gregg Berman, the associate director of the SECs office of analytics and one of its top advisers on market structure. Berman said in a speech in New York on April 15 that the debate has become too narrowly focused and myopic and that both sides should be considered.
This is an extremely complex and important issue, and we agree with Chair White that any reform of the markets should be the result of a thoughtful, data-driven approach that relies on empirical data, Kenneth E. Bentsen, president and CEO of the Securities Industry and Financial Markets Association, said in a statement today.
Registering Traders
Sprechers peer at Nasdaq OMX Group Inc., Robert Greifeld, said in a statement that Whites plans underscore the importance of maintaining an environment that supports transparency, simplicity and fairness across the capital markets. Nasdaq, ICE and Bats Global Markets Inc. are the three biggest U.S. stock exchange owners.
Proprietary traders who use computers to buy and sell stocks in milliseconds would be required to register with the SEC under recommendations proposed today by White in New York. The rules would bring some HFTs under federal oversight for the first time.
High-frequency trading is a catch-all term for a diverse set of software-driven strategies that spread from U.S. equity markets to most developed countries as computer power grew and regulators tried to break the grip of centralized exchanges. While the tactics vary, they usually employ super-fast computers to post and cancel orders at rates measured in millionths of a second on markets for stocks, options, currencies and futures.
Extremely Difficult
HFTs account for about half of share volume in the U.S. Exchanges rely on them for profits as well as liquidity, with electronic market makers all but eliminating the old system of human floor traders who oversaw the buying and selling of equities. While critics such as Lewis see a Wall Street plot, proponents say the new system is faster and cheaper.
White is in an extremely difficult position, said Sang Lee, managing partner at Boston-based research firm Aite Group LLC. You are a regulator, but you also dont want to squash innovation in the marketplace. One can argue HFT is an innovation. But is it an innovation thats gone too far? Thats what theyre trying to address.
Operators of dark pools, broker-owned venues that compete with exchanges and dont publicly publish bids and offers, would have to provide the regulator with their rules for matching buyers and sellers, White said. The SEC is also preparing a rule that would require more oversight of algorithms, or software that automate buying and selling.
Like Music
The SEC proposal is music to my ears, said James Angel, a professor of finance at Georgetown University. Many, including myself, have been calling for a comprehensive review where we step back, take a breath and look at the market from top to bottom. Angel used to serve on an exchange board at Direct Edge Holdings LLC, which merged with Bats this year.
Under the plan White outlined today, stock exchanges also will come in for more scrutiny. The SEC will review the exchanges dozens of order types, which have been criticized for adding complexity with little public benefit by Sprecher.
The SEC also will work with stock exchanges to address claims of unfairness in how order and price data reach the public. Traders using exchange-sold direct feeds get orders and prices faster than investors relying on the public ticker, a gap highlighted in Lewiss book and criticized by New York-based trading-platform provider IEX Group Inc. CEO Brad Katsuyama.
I was encouraged by the level of detail and by the thoughtful tone of the speech, said Matthew Andresen, the Chicago-based co-founder of Headlands Technologies Inc., a quantitative trading firm. This is clearly an area of great focus for the commission, and they are clearly committed to a data-driven, methodical approach to improving the markets structure. The specific proposals in there sound like good policy ideas in general, and now the hard work begins to translate those into specific rules.
