The market structure for trading stocks in the U.S. isn't broken or rigged, Securites and Exhcange Commission chair Mary Jo White said today in a speech in New York, but do require some reforms. Today's speech was White's most extensive on market structure, and directly addressed the controversy over high-speed trading and trading outside of stock exchanges touched off by Michael Lewis's book Flash Boys and the 2010 "flash crash," when a large number of stocks massively dropped and then rose back in price in about 15 minutes.
She proposed a number of reforms, but also pushed back against critics who say the market structure is fundamentally unstable and designed to profit some high-speed traders and the exchanges of which they're some of the largest customers.
Her proposals, which would have to be developed into specific rules by the Commission, submitted for comment, and then approved, tend to emphasize making the existing market structure more simple and transparent, as opposed to a full-scale overhaul of equity trading.
Regulators "should not roll back the technology clock or prohibit algorithmic trading," White said.
"The equity markets are strong and generally continue to serve well the interests of both retail and institutional investors," White said. Trades done at very high speed and executed automatically through algorithms "likely represent well over a majority of trading volume."
She did, however, propose some reforms, including rules to address "disruptive" high speed trading that can make stock prices significantly more volatile as well as bringing proprietary traders under the regulatory umbrella by making them register as broker-dealers (like the equity trading arms of banks like Goldman Sachs) with FINRA, the Wall Street self-regulator. "FINRA membership should significantly strengthen regulatory oversight over active proprietary trading firms and the strategies they use," White said.
She also called for more transparency in how so-called "dark pools" (off-exchange trading venues that are not required to post orders for trades) operate, as well as making public data from other trading venues. "Transparency has long been a hallmark of the U.S. securities markets, and I am concerned by the lack of it in these dark venues," White said. "We must continue to examine whether dark trading volume is approaching a level that risks seriously undermining the quality of price discovery provided by lit venues." The more-than 40 dark pools and other off-exchange venues make up more than a third of all equity trading in the U.S., according to Rosenblatt Securities.
White also asked the Commission to come up with a rule that would require more comprehensive disclosures of how brokers route the orders they receive from customers. Large institutions that trade through a broker like Goldman Sachs or Morgan Stanley should be able to get "useful, reliable, and uniformly available" disclosures of order routing, beyond what current rules call for, which address a broker's routing of all orders, but not for individuals clients.
Activists and even some large participants and stock trading have also pointed to our complex order types for trading stocks as another area of market structure complication. Jeffrey Sprecher, the head of ICE, the parent company of the New York Stock Exchange and several other exchanges, said last month that the NYSE should reduce the number of order types it offers. White said in her speech today that exchanges should "conduct a comprehensive review of their order types and how they operate in practice."
Many of the complex order types are designed to capture fees that exchanges offer to entice brokers to trade with them. "A number of fee structures are intertwined with many aspects of the current market structure, including the trading strategies that generate quotes on the public exchanges," White said. One SEC commissioner, Luis Aguilar, has called for a pilot program to study how exchanges would operate if they couldn't offer the most popular form of this fee, called "maker-taker."
"We will continue the disciplined, data-driven approach to market structure," White said. "Our comprehensive review and follow-up actions will ensure that our equity markets continue to operate fairly and efficiently, and in a manner that both optimally protects investors and promotes capital formation."