Equity Market Rules Are Overdue for Update, Lawmaker Says
A high-ranking Republican lawmaker plans to press regulators to undertake a wholesale examination of its rules governing U.S. equity markets.
Representative Scott Garrett, a New Jersey Republican, said a roundtable he’s assembled on May 13 will try to “refocus” the SEC’s attention on market structure, including how exchanges, dark pools and U.S. brokerages compete for traders’ business. The panelists include academics, attorneys, and investors with expertise in the issue.
SEC Chairman Mary Jo White told the Senate in March that she planned to prioritize oversight of high-frequency trading and electronic markets. NYSE Euronext (NYX), Nasdaq OMX Group Inc. (NDAQ), and Bats Global Markets Inc. have met with White and other commissioners in recent weeks as they seek new regulations that may restrict trading that occurs away from their exchanges.
“The history of the market is it’s grown beyond the regulations that were put in place,” Garrett said in a phone interview. “There is significant room for improvement here.”
Garrett, who heads a capital markets subcommittee in the House, said any reforms should improve transparency and competition. He said he isn’t “driving at any result” such as limiting trading away from exchanges.
Representative Jeb Hensarling, chairman of the House Financial Services Committee, said last year that regulators should be cautious about passing new market-structure rules. Hensarling, a Texas Republican, said high-frequency trading had produced benefits for investors such as lower prices and deeper liquidity.
“Markets should have to adapt to the new technology, be it the telegraph of the 19th century of high-frequency trading of the 21st,” Hensarling said during a speech at the American Enterprise Institute in June 2012.
Today’s fragmented equity markets, which include 13 exchanges and nearly 40 dark pools, are a product of innovation, competitive pressure and SEC regulations implemented over the past 20 years. The SEC issued a 74-page paper in 2010 that asked whether its regulations need updating to catch up with innovation and trading practices.
Such papers, known as concept releases, sometimes serve as a prelude to new regulations. Since the 2010 paper, the SEC has focused on writing regulations mandated by the Dodd-Frank Act and responded to technology glitches, such as the May 2010 flash crash that briefly erased $862 billion in market value in less than 20 minutes, and mishandled initial public offerings by Facebook Inc. (FB) and Bats. Those mishaps spurred the SEC to introduce new market rules and technology controls to limit the damage caused by automation errors.
“I don’t think there has been bandwidth to deal with the holistic review they wanted to do three and a half years ago,” said Justin Schack, a managing director at institutional brokerage Rosenblatt Securities Inc.
Lawmakers such as Garrett appear to be in a “fact-finding mode,” rather than aiming for specific outcomes, Schack said in a telephone interview. The Senate Banking Committee held a hearing in December that focused on the migration of trading away from exchanges.
Some of the panelists plan to use the event to press their own proposals for reform.
Andrew M. Brooks, vice president and head of U.S. equity trading for T. Rowe Price, said the SEC should adopt pilot programs that undo practices that he views as favoring high-frequency traders, including allowing them to place their computers near the trading engines of exchanges or other venues. Brooks is participating on a panel that will discuss high-speed trading and exchange business practices.
“All of us need to check our self-interest at the door and check what might be in the best interest of market participants,” Brooks said in a phone interview.
SEC Commissioner Daniel M. Gallagher also will participate in the roundtable, according to his office.
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