The Securities and Exchange Commission made it resoundingly clear on Thursday it hasn’t fallen asleep at the wheel concerning controversial issues on current market structure. In a comprehensive statement made by SEC Chairwoman, Mary Jo White, the top securities regulator focused on areas of the market where regulation has been outpaced by technological development. Though the statement was more of a synopsis than a thorough and itemized action plan, it is nonetheless the agency’s most revealing proclamation to date regarding what we can expect from the SEC in the near future.
Ever since Michael Lewis appeared on “60 Minutes” and proclaimed the markets are rigged, high-frequency trading (HFT) has been a lightning rod of controversy. In her statement, the chairwoman made a point to allay investor concerns saying the markets are more functional now than ever before. White pointed to lower transaction costs for institutional investors, decreased intraday volatility since the financial crisis, and smaller spreads for retail investors enabling them to trade at the best prices.
While offering assurance that markets are functional, her speech denoted a few areas the SEC will be scrutinizing more intensively. An area of particular concern for White is the use of “aggressive” and “destabilizing” trading strategies during vulnerable market conditions, which could create hazardous price volatility. To address this risk, White has directed the SEC to recommend an “anti-disruptive trading rule” whose purpose is to curb aggressive short-term trading by HFT traders during such conditions. Furthermore, the chairwoman said she has asked her staff to create a rule that force HFT firms to register with the agency.
Another provision put forth by White deals with the realm of ‘dark pools,’ and would ask that the Financial Industry Regulatory Authority (FINRA) close a loophole that allows firms to forgo registering with the self-regulator by trading off traditional exchanges. ‘Dark pools’ refer to private trading venues that allow investors to trade anonymously, hiding the volume of the trade and who is making it until after it has been transacted.
The issue with dark venues is one of transparency. In addition to its lack of transparent trading data, dark venues also provide limited information on how they operate. In her statement, White touted transparency as the primary tool used by investors to protect their interests and said its lack in dark venues is troubling. For that reason, White said the SEC is working on a requirement for dark pools to disclose more to regulators and investors about how they are run.
Just the Beginning
White’s statement should be seen as the first baby step in the next phase of regulatory overhaul. Despite its comprehensive nature the reality is that once the specific rules start to take shape, debate will start to heat up. To help take into account the variety of opinions moving forward, White asked that the SEC create a “market structure advisory committee” of experts from differing backgrounds to give insight on any proposed rules or initiatives.
Once specific rules are developed they will then go through further scrutiny, including a period for public comment, which would take anywhere from months to years. Whatever the eventual outcome is, for now Wall Street will be sticking with the status quo.