While the United States has the deepest and strongest equity markets in the world, but the number and complexity of exchanges and their alternatives poses risks which legislators must consider.
That was the message – heard from both Democrats and Republicans- at the House Financial Services Committee hearing entitled “US Equity Market Structure”
“The United States has the deepest, most effective, and strongest capital markets in the world,” said Democratic Congresswoman Carolyn Maloney of New York.
“Today, a significant amount of trading is performed by algorithms,” said her counterpart Bill Huizenga, a Republican Congressman from Michigan, who noted that competitive equity markets and electronic trading have mostly benefited investors and traders but “some critics of the current market structure have pointed out that around a dozen public exchanges and about fifty alternative venues today’s equity markets are overly complex and fragmented.”
Continuing with that concern, Matt Lyons, the Senior Vice President and Global Trading Manager of The Capital Group, noted: “Today, equity securities trade on approximately four dozen trading platforms, each with its own fee schedule, rulebook, and unique order types.” Lyons stated during his opening remarks. “The national securities exchanges drive price discovery by advertising the prices at which market participants will buy or sell listed securities. Regulation NMS protects these displayed quotations by requiring each trading center such as an exchange and ATS to adopt written policies and procedures designed to prevent the trading center from executing a transaction at a worse price than the best bid or offer displayed by a national securities exchange, subject to certain specified exceptions.”
Regulation NMS, which Lyons referred to, was established in 2005 to “competition among individual markets and competition among individual orders.”
It has become controversial because it forced traders to trade on the venue with the cheapest price without considering speed and reliability, Congresswoman Maloney noted that she believed that Regulation NMS contributed to the explosion of high-frequency trading.
Joseph Saluzzi, Partner and Co-Founder, Themis Trading LLC continued with the same concern: “Today’s stock market is comprised of 13 stock exchanges, close to 40 alternative trading systems also known as dark pools and numerous off-exchange ‘liquidity providers’ who are not regulated with the same disclosure and practices yardstick.
“This fragmentation particularly escalated after the SEC passed Regulation NMS in 2005. While the SEC believed Reg NMS would create competition among stock exchanges to provide the best prices for investors, we are certain that they did not anticipate that their regulations would also pervasively result in a high-speed competition to trade against long-term investors. And we hope that the SEC did not think that fragmentation among 13 stock exchanges, 40 something dark pools, and now off-exchange liquidity platforms would be a desired result.”.
“Sadly, many of the concerns that we highlighted in our book are still a problem today,” Saluzzi stated.
“I think one theme which is coming out of this hearing already is that while we have this great electronic market that is super-efficient I think there are areas of disclosure and transparency that need to be improved,” said Ari Rubenstein, Chief Executive Officer of Global Trading Systems, and another witness.