Are Regulators and Markets on the Same Page With High-Speed Trading?

Terry Flanagan

SEC chair Mary Jo White’s June 5 speech on market structure was a carefully crafted message that combines specific recommendations with an expression of fundamental beliefs about fairness and equality.

“As I read through Mary Jo White’s speech, I think there were a lot of touchstones back to fairness, back to equitability of how does this market structure work with investors to get better execution,” Nick Colas, chief market strategist at ConvergEx Group, told Markets Media. “There were a lot of notions of fairness embedded in her comments.”

A survey on equity market structure released by ConvergEx in April, which gauged the concerns of market participants regarding high-frequency trading, regulatory oversight and market stability, found that a majority of respondents believe that U.S. equity markets are not fair for all participants (70%) and that HFT is harmful to market participants (51%). Despite these concerns, almost three-quarters of respondents (71%) said they had not made changes to the way they interact with markets.

“One of the central points of the survey was this question about whether market participants feel that current equity market structure is fair to all concerned,” Colas said. “To us, fairness speaks to a whole range of social issues, as well as just the mechanical ones of whether or not the current market structure is accurate, or is durable, or prices securities reliably. It really speaks to the confidence that capital markets work in concert with other functions to create a better, fairer society over time.”

During an April 23 panel discussion held by ConvergEx, representatives of the buy side, as well as HFT firms, sell side, exchanges, and service providers addressed ConvergEx clients on market structure. Several of the themes expressed there, such as the impact of HFT, foreshadowed White’s speech.

“There were obviously questions of fairness [at the April 23 panel],” Colas said. “Do HFT players have an unfair advantage relative to other investors? Is their slice of the capital markets pie too big, too small, or just right? That was a central point of the discussion.”

There were varying opinions about whether HFT took an appropriate amount of market profit or not. “Obviously, HFT players thought it was fair and some long-term investors thought it was perhaps a bit too much, but it wasn’t yet consensus about whether or not HFT has the appropriate amount of what an economist would call ‘excess rents’ in the system,” said Colas. “That’s still a conversation the market’s going to have for the next five years. I don’t think that’s going away.”

Toward the end of the speech, in a section called “Building Quality Markets for Smaller Companies,” White mentioned that the number of domestic companies listed on US exchanges has now dropped in half from the highs of more than 7,000 in the 1990s, and also a lot fewer IPOs. “One area that maybe doesn’t get the press that it does should is ultimately capital markets are there to raise money for new businesses that need the capital to grow and expand the economy,” said Colas. “The trial that’s going to come up on nickel spread sizes [is] particularly important.”

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