Given the choice between battling criminal investigators or answering to an experienced regulator who disputes claims the stock market is broken, it’s no surprise whom traders are cozying up to.
U.S. Securities and Exchange Commission Chairman Mary Jo White yesterday disclosed plans to bolster oversight of high-frequency traders and examine secretive private platforms known as dark pools. The announcement came almost two months after Bloomberg News reported that New York Attorney General Eric T. Schneiderman subpoenaed six firms as part of his probe into automated trading.
While Schneiderman’s inquiry was greeted coolly by industry executives, praise for White and the SEC was almost effusive yesterday from exchanges (ICE:US) and high-frequency firms. White said the $23 trillion U.S. stock market isn’t broken, an assessment that sits well with an industry portrayed as out of control in Michael Lewis’s book “Flash Boys.”
“I don’t know what else she could say,” said Sang Lee, managing partner at Boston-based research firm Aite Group LLC. “It’s an extremely difficult position. You are a regulator, but you also don’t want to squash innovation in the marketplace. One can argue HFT is an innovation. But is it an innovation that’s gone too far?”
Four years after the flash crash and almost a decade since SEC rule changes helped electronic traders supplant humans, the U.S. securities industry is under pressure to prove individual investors are treated fairly. The SEC plan would subject the private networks known as dark pools to more review, register proprietary firms that engage in high-frequency trading and explore whether prices are disseminated fairly to investors.
Schneiderman said on April 4 that new laws may be needed to safeguard markets. His office subpoenaed high-frequency firms including Chopper Trading LLC, Jump Trading LLC and Tower Research Capital LLC, according to a person familiar with the matter. Two weeks earlier, he said predatory behavior gave some firms an “enormous” and unfair advantage.
Yesterday, he said on Twitter that he’s “pleased to see” White’s comments “calling for market reforms to curb unfair advantages for HFT.”
At the SEC, speed traders have faced less withering criticism from White and Gregg Berman, the Princeton-trained physicist who oversees the agency’s office of analytics. Berman said in a speech in New York at the height of the furor ignited by Lewis’s book in April that the debate around market structure had become “too narrowly focused and myopic” and that both sides deserved to be heard.
In remarks on May 2 at a conference near Austin, Texas, Berman aimed a rebuttal at critics and “maybe an attorney general” who assume Washington regulators can’t keep up with market participants.
He noted that the agency has a new surveillance system, known as Midas, that collects price data from all U.S. exchanges and that helps the SEC evaluate practices such as co-location and proprietary feeds. The agency can’t be ignorant of market behavior when it is guided by such data, he said.
The SEC is aiming to bring more transparency to markets and address claims of unfair advantages held by traders that account for about half of U.S. stock executions and have been blamed for everything from the flash crash of May 2010 to market volatility during the European debt crisis.
Among proposals under review is a rule that would require more oversight by traders of their algorithms, formulas that automate the buying and selling of shares, White said. While White said she was wary of setting speed limits on traders, the SEC will consider options for minimizing the speed advantage that some have.
The SEC initiative detailed yesterday is “a well-thought-out, very concrete, very thorough and broad pronouncement,” Ari Rubenstein, chief executive officer of high-frequency trading firm Global Trading Systems LLC, said in an interview. “What she’s saying is that now that the misguided and misinformed accusations are behind us, we can focus on making the markets better for investors.”
There’s common ground between White and Schneiderman. The New York attorney general has questioned whether the opaqueness of dark pools does harm to the market. White echoed that concern yesterday.
“The current extent of dark trading can sometimes detract from market quality,” White said in her speech yesterday. Off-exchange trading now accounts for about 40 percent of trading. “Transparency has long been a hallmark of the U.S. securities markets, and I am concerned by the lack of it in these dark venues,” the SEC chief added.
Unlike exchanges run by Intercontinental Exchange Inc., Nasdaq OMX Group Inc. (NDAQ:US) and Bats Global Markets Inc., dark pools don’t publicly display bids and offers.
Speaking at the same Sandler O’Neill & Partners LP event as White, the CEOs of ICE and Nasdaq, whose venues have lost market share to dark pools, both praised her announcement.
An SEC-led review of market regulations is bound to be “thoughtful and well done,” said Keith Ross, the CEO of Glenview, Illinois-based trading platform PDQ Enterprises LLC. Regarding White’s comments, “I would guess traders thought this is something they can work with. There’s nothing draconian yet.”
The SEC plans to cooperate 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. That’s an area where Schneiderman sees a problem.
“I was encouraged by the level of detail and by the thoughtful tone” of White’s 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 market’s structure.”
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