In Election Year, U.S. Politicians Shrug Off Market Reform

Terry Flanagan

With the U.S. presidential election around the corner, there’s a strong likelihood that market structure issues will take a back seat.

“The average Washington policymaker is like a retail investor in terms of understanding capital market structure,” said Clarke Camper, senior vice-president and head of government affairs and public advocacy at NYSE Euronext, the transatlantic exchange operator.

“In an election season, no one pays much attention to it unless there’s a major event,” Camper said.

Notwithstanding the Knight Capital trading fiasco and similar events that have taken place in 2012, retail investors are more influenced by macro economic factors.

“We’ve been seeing retail investors pulling back from the markets since 2008,” said Michael Masone, director and counsel, equities division at Citigroup Global Markets. “The markets have since recovered, but the retail investor isn’t there.”

Weaknesses in market structure certainly haven’t helped, however.

“We’ve had a number of black swan events, starting with the May 6, 2010 flash crash, and continuing this year with the Bats IPO, Facebook and Knight. We are not helping ourselves as an industry,” Masone said.

Camper at NYSE Euronext foresees the presidential race as being close, but a Mitt Romney Republican victory is unlikely to result in a rollback of the Dodd-Frank Act.

“The Dodd-Frank Act isn’t going away,” he said. “If Romney wins, however, regulators will be less supportive of new legislation, which could create more uncertainty than we have now.”

Looking past Election day in November, however, the rise of automated trading and the software glitches such as the one that ensnared Knight are unlikely to escape the attention of regulators.

“There’s been a strong move toward automation, which is reflected in the structure of banks,” Masone at Citigroup said. “The electronic trading executives have moved into senior management, and even high-touch business eventually gets dropped into algos, where they’re sliced and diced. The question of who has appropriate oversight to ensure that algorithms are properly tested is likely to intensify in the months ahead.”

The Securities and Exchange Commission, the main regulator of U.S. equity markets, is to host an industry round table on October 2 exploring ways to safeguard markets against automated systems. It is thought that HFT now accounts for over 60% of U.S. daily volumes, while that figure is around 40% in Europe and less again in Asia.

One regulator that appears to be slightly ahead of the curve is the European Securities and Markets Authority (Esma), which has written detailed reforms to better monitor algorithmic trading practices such as high-frequency trading. These rules are now beginning to be applied across the whole of the European Union.

Hong Kong’s Securities and Futures Commission, in a July consultation paper, proposed guidelines for algorithmic trading and direct market access, including the annual inspection of algorithms and systems put in place to prevent erroneous trades spewing into the marketplace.

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