A technology arms race that risks destabilizing U.S. stock markets was triggered by regulations intended to promote competition among the exchanges, Wall Street executives told a Senate committee.
The Securities and Exchange Commission’s rules for a national market system have come under scrutiny as lawmakers examine whether high-frequency traders have exploited changes introduced by regulators, exchanges and brokers. The SEC’s rules require all exchanges and brokers to connect to one another to ensure that investors receive the best available prices when they buy shares.
The Senate Banking Committee’s hearing today could intensify pressure on the SEC to change rules it enacted over the past decade. SEC Chair Mary Jo White has said the agency will examine whether its rules have pushed trading away from public markets in favor of private venues such as dark pools.
Man, Machine and the U.S. Stock Market
“The costs associated with maintaining access to each venue, retaining technologists and regulatory staff, and developing increasingly sophisticated risk controls are passed on to investors and result in unnecessary systemic risk,” exchange operator Intercontinental Exchange Inc. (ICE:US) Chief Executive Officer Jeffrey Sprecher told lawmakers.
Executives from Citadel LLC, Invesco Ltd. (IVZ:US), Nasdaq OMX Group Inc. (NDAQ:US) and BATS Global Markets Inc. also testified at the Banking Committee’s session, which follows other congressional hearings on high-speed trading triggered by publication of Michael Lewis’s book, “Flash Boys.” The book said that stock markets are plagued by conflicts of interest that benefit high-frequency traders and harm long-term investors.
“Many of the concerns raised by market participants and investors are the outgrowth of SEC Regulation NMS and the overall patchwork approach to market trading infrastructure and stability taken by the SEC in the past,” Senator Mike Crapo, an Idaho Republican, said today.
Citadel Chief Executive Kenneth C. Griffin, Nasdaq Executive Vice President Thomas A. Wittman and KOR Group LLC President Dave Lauer also fault regulation for failing to keep pace with changes in market behavior. The SEC should, for instance, remove longstanding privileges allowing dark pools to discriminate against some customers to the benefit of others, according to Griffin. Dark pools now account for 14 percent of total share volume, according to estimates by Rosenblatt Securities Inc.
“Regulation has created this monstrosity of a market, and it is only by peeling back some regulations and refining others that we can hope to simplify market structure and increase market efficiency,” Lauer told lawmakers in prepared remarks.
The committee also heard calls to simplify the pricing model used by exchanges, which Sprecher has said should be banned. The so-called “maker-taker” model pays rebates to traders who stand ready to buy or sell shares as needed, while charging those on the other side of the transaction. Exchanges profit off the difference between those fees.
“It’s great that we compete for those commission dollars but we’ve lost track of getting the best price for a company that’s trying to raise capital and an investor like me,” Sprecher said.
The SEC should revisit its rules while being careful to avoid changes that would impose speed limits on traders or create new advantages for some market participants, according to BATS Chief Executive Joseph P. Ratterman.
“Whether it is banning the current maker-taker fee structure, limiting payment for order flow generally, or other attempts to alter the fundamental economics of trading, price controls are a blunt instrument likely to cause disruptions and consequences that are unforeseeable and potentially detrimental to all types of investors,” Ratterman said in his prepared testimony.
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