Calls for Market Structure Review Renewed

Terry Flanagan

The hoopla surrounding the publication of Flash Boys by Michael Lewis is helping to rekindle calls for a “holistic” equity market structure review by the Securities and Exchange Commission.

The Security Traders Association has recommended that the SEC undertake such a review, including such topics as payment for order flow, co-location, measurements for best execution, the role of the Securities Information Processor, the uptick rule, and cancellation fees.

The role of dark pools is at the center of the market structure issue. This has found scope in the form of a trade-at rule, which has been adopted in Australia and Canada but not in the United States.

“There is a debate between exchanges and broker dark pools,” said Howard Meyerson, general counsel at Liquidnet. “The issue is, if you trade in a broker dark pool, should you have to trade at a better price? The exchanges say yes, and the broker dark pools say no.”

The issue doesn’t affect Liquidnet, because it executes well over 90% of its trades at the midpoint, and also blocks would be exempted from any type of Trade-At requirement.

“We don’t think it should be illegal to give a customer a better price on the trade,” Meyerson said. “We think that’s contrary to best execution. The exchange proposals all include an exemption for blocks and trades at a better price.”

While many of the recent conversations pertaining to high-frequency trading (HFT) are not new, it is evident that the debate has intensified and broadened to every participant in the market place, the STA said in a letter. “Over the past two weeks, CEOs and other business leaders have issued statements where they believe HFT fits into today’s marketplace and offered a litany of solutions. It is clear that there is a lack of consensus on what is a major piece of today’s market structure.”

The STA emphasized that “review” does not mean “change”. A review based on empirical data will go a long way toward answering questions where a wide divergence of opinion exists, it said.

“HFT has been somewhat cloaked in mystery and people don’t understand, at least not across the entire industry, how it works and what it does,” said an industry source. “Therefore, people are having opinions that are not totally informed.”

A general knowledge around how HFT operates would help solidify some of the opinions, and perhaps close the gap on whether it’s “good” or “bad.”

The key to any market structure review is the ability to collect and analyze empirical data, and the SEC has made strides in this area.

“There have been improvements at the SEC in both quantitative and qualitative data,” said the industry source. “They’re able to pull a lot of data in through the MIDAS system that they recently rolled out. Granted, it is only one snapshot of the market activity but it is still good activity.”

The STA cautions against implementing any new financial transaction tax (FTT), which it believes raises the cost of investing and hurt overall liquidity and capital formation.

“The FTT is a concern,” said Meyerson. “If a mutual fund is buying stock and has to pay a tax on that purchase, that’s a cost that would have to get passed through to tens of millions of Americans who invest in mutual funds, and that’s our primary customers’ base.”

Feature image via iStock

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