05.22.2015
By Terry Flanagan

OPINION: SEC Asks Why

Market participants and market operators don’t always have the kindest things to say about the U.S. Securities and Exchange Commission. They are out of touch, their staff isn’t knowledgeable enough, they overreach, etc. etc.

But one criticism that people can’t justifiably make about today’s SEC, is that its leader is incurious.

At the Equity Market Structure Advisory Committee meeting on May 13, SEC Chair Mary Jo White asked no fewer than 10 pointed questions in her opening remarks. She wasn’t looking for answers at the time, but it’s reasonable to assume that she’ll be looking for answers sometime in the future.

Chair White’s question set was framed from the perspective of an investor or a CEO at a stock-issuing corporation. Such people aren’t in the market everyday and don’t know its intricacies; when they learn of its intricacies — and indeed the intricacies are intricate — they may well be floored by the complexity, which for traders, brokers and market operators is just another day at the office.

Some of Chair White’s stumpers:

-Why are there 11 exchanges that trade listed equities…What distinguishes these exchanges in terms of the services they offer investors and public companies?
-Why are there hundreds of different order types across the various exchanges?
-Why are 94% of displayed orders in corporate stocks cancelled without an execution?
-Why are there more than 40 dark pool ATSs that trade listed equities?
-When retail brokers negotiate with off-exchange market making firms for directing customer’s marketable orders to those firms, why do the negotiations include both the level of price improvement expected for investor orders and the payment of millions of dollars to the broker?

Prior to the questions, Chair White distinguished between complexity that improves market quality, and complexity that exists seemingly just for the sake of complexity, and to provide a living for additional market intermediaries. I think this is an important distinction, and it provides some confidence that the SEC will not throw the baby out with the bath water.

To be sure, Chair White’s set of questions are just that, a set of questions. It’s unclear when and even if action will be taken, and what the action will look at. But it’s good that she’s seeking answers first.

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