Yesterday, Securities and Exchange Commission chair Mary Jo White gave a speech about the current structure of US markets. Her comments directly addressed the controversy over high-frequency trading (HFT) and dark pools (trading outside of exchanges) brought up by Michael Lewis’s book “Flash Boys” and New York Attorney General Eric Schneiderman’s recent series of moves to try to ban HFT. Lewis’s one-sentence summary of his book on a post-release interview: “The US stock market… is rigged”.
White, however, disagrees. The structure “is not fundamentally broken, let alone rigged”, she said. However, she did announce a plan to reform market structure. The two most concrete new rules require high-frequency traders to register with the SEC and operators of dark pools to let the SEC know how they match buyers and sellers. Sam Mamudi and Nick Baker at Bloomberg Businessweek note that “praise for White and the SEC was almost effusive yesterday from exchanges and high-frequency firms”.
Yves Smith is unimpressed, suggesting White is dragging her feet. What regulators have done all too often lately, Smith says, is “make sufficient noise about a problem so as to appear to be doing something, but take a generally Panglossian view of the current system and focus only on a few undeniable warts to as to appease critics”.
Of course that’s what she’s doing, says Matt Levine. This is just a reflection of the SEC’s worldview, which is essentially that HFT makes markets more efficient at the end of the day:
If you think that the current HFT business model is basically good for the world, then you will be hesitant to make fundamental changes to it. And if you’re the SEC, and you’re under a lot of Michael-Lewis-driven pressure to make fundamental changes to market structure, what do you do? Disclosure. You do disclosure. To be fair, disclosure is the SEC’s answer to most questions, but it’s especially the answer to questions that the SEC doesn’t especially want to talk about.
Whether or not you think this was the right move by the SEC, there is some question as to whether it even has the ability pull off enforcement of big changes in market structure. Georgetown finance professor James Angel told Bloomberg, “The SEC has so many irons in the fire and they are so under-resourced. The real question is can they actually do it?” — Shane Ferro
On to today’s links: