For more than a decade, John Ramsay had red tape over his mouth. Now that he’s left government bureaucracy, he says he’s been “uncorked.”
Ramsay, 55, formerly the U.S. Securities and Exchange Commission’s director of trading and markets, joined the stock-trading venue founded by Brad Katsuyama, IEX Group Inc., in June and soon began slamming the industry he’d overseen for the SEC. He called out the “convoluted” and “illogical” pricing rules of major stock exchanges and compared the $25 trillion U.S. stock market’s structure to the Death Star of “Star Wars.”
Ramsay’s denunciations come during a period of unprecedented scrutiny of equities trading. A chorus of criticism, sparked by the claim in Michael Lewis’s book about Katsuyama and IEX, “Flash Boys,” that the market is rigged against retail investors, has questioned the tactics involved in using algorithms to buy and sell shares in fractions of a second. Ramsay’s opinions, blunt and impassioned, have extra heft because of his experience as a regulator.
“I’ve been able to find my voice on these issues in a way I couldn’t have done when I was in the government, because you’re always limited by internal politics and not wanting to get too far out in front of the agency,” he said. “I feel like I’ve been a little bit uncorked.”
Don’t expect Ramsay to let up. Last week, IEX hired a chief regulatory officer to assume part of Ramsay’s responsibilities, freeing him to focus on his role as the New York-based firm’s chief market policy officer and resident straight talker.
“He’s a guy who accomplished a lot and doesn’t have anything to prove,” said James Burns, who worked with Ramsay at the SEC and is now a partner at the law firm Willkie Farr & Gallagher LLP.
Ramsay helped the SEC hammer out the post-crisis Volcker Rule, which bans government-insured banks from gambling with depositors’ money. The rule has an exemption -- it allows banks to continue “making markets,” or standing ready to buy or sell stocks and bonds from customers. Financial regulators initially clashed over that exemption, with banking agencies fretting that the language would open loopholes for Wall Street to exploit.
Ramsay helped ease the tension with clear language and humor, bank regulators said. Ramsay was the voice at the table “making us understand how market making is done, and what kind of parameters are around it,” said Scott Alvarez, the Federal Reserve’s general counsel.
“He’s fascinated with how trading actually runs and works,” said Richard Ketchum, chief executive officer of the Financial Industry Regulatory Authority who once hired Ramsay to work with him at Citigroup Inc. “The bank regulators valued his knowledge and understanding of how fixed-income market trading works and what could be viewed as market making or not.”
Ramsay’s decision to join IEX, a tiny private market with a populist mission, was an unusual move for a former regulator, Burns said. He could’ve used his intimate knowledge of the Volcker Rule to land a job at a law firm or a bank. Instead, he found something “that’s fun and a little bit edgier,” Burns said.
Ramsay’s positions often put him at odds with his previous employer. The SEC’s current trading rules, known as Regulation NMS, are partly responsible for the flourishing of high-frequency trading and the dispersion of trading across more than 40 venues, he said. And he’s been unafraid about taking his viewpoint to Wall Street.
“The current market ecosystem is not sustainable, and significant changes are coming one way or another,” Ramsay said in a speech delivered at a New York technology conference in September.
He outlined how the market lost its way: conflicts of interest among brokers, a two-tier system favoring the speediest and a general sense that today’s rules have been crafted to the benefit of insiders.
In an interview, Ramsay said his opinions grew more critical in recent years as he watched the market fragment into 11 public exchanges and more than 40 less-regulated private venues such as dark pools. Trading became more complex and prone to technological malfunctions in the face of rules that were supposed to boost competition and create new choices for investors, he said.
IEX, he said, can be part of the solution.
That’s what Lewis wrote in his best-selling book. IEX doesn’t pay firms to buy or sell shares, shirking a practice that many markets use to lure high-speed traders. Amid concern that markets are more vulnerable to mistakes because trading is faster and largely automated, IEX requires a 350-microsecond delay between requests to trade and actual executions. That might not sound like a lot, but it’s a length of time almost considered old-fashioned buy-and-hold investing in an environment where shares can trade faster than an eye blink.
Ramsay, a Houston native, said he first sought a job at the SEC because he was dismayed with what he’d seen as a lawyer representing clients in Texas during the savings-and-loan crisis. He wasn’t known as a dissenting voice at the SEC, which he joined in 1989. His views on market structure evolved over the past several years, he said.
Ramsay suggested at a conference in Washington in 2014 that some high-frequency traders who had escaped formal SEC oversight should fall under the agency’s rules. Three months later, SEC Chair Mary Jo White announced in a speech that the SEC will require those traders to comply with the rules for broker-dealers.
The change “should significantly strengthen regulatory oversight over active proprietary trading firms and the strategies they use,” White said.
Allowing innovation by firms such as IEX is preferable to making wholesale regulatory changes that could have unintended consequences, Ramsay said. It should be companies, not government, that develop viable alternatives.
“This is a space that is ripe for change and some element of disruption,” he said.
(An earlier version of this story was corrected to fix the year of Ramsay’s speech in the 18th paragraph.)