Market structure analysts and consultants worry that the Securities and Exchange Commission's Equity Market Structure Advisory Committee will bypass concerns of asset owners' by concentrating on retail investor issues.
The committee, which held its first meeting May 13 in Washington, will study the structure and operations of the U.S. equities markets over its two-year term and make recommendations to the SEC on regulatory changes.
Noted Steven Glass, president and CEO of Zeno Consulting Group LLC, a Washington-based trading consultant to pension funds: “Buy-side representatives will talk about institutional issues, but there are distinctions between institutional managers and asset owners. The buy-side traders straddle the marketplace, they also worry about microstructure issues like high-frequency trading.”
Mr. Glass said the subject of the committee's opening session May 13 — trade-through rules — is an example of the SEC's microstructure focus.
“For the committee, agenda items like that are all tied in at the microstructure level to what the SEC considers best execution — getting the best price. That's different from a pension fund that's looking at the big picture. Let's say a manager buys 50,000 shares of a stock, with 200 shares being traded on a certain exchange because it's a penny cheaper because of concern over high-frequency trading. But even with that small trade, there's information leakage before the other 49,800 shares are traded. Before (Regulation NMS), it would be OK if not traded in one block at a higher price to avoid leakage. Now, with Reg NMS, that might not be the case. ... The SEC is focusing on the micromarket. I worry they can't see the forest from the trees and forget about the bottom line. ”
Regulation NMS, introduced in 2007, requires that equity investors receive the best price executions for their orders.
Kevin Cronin, global head of trading at Invesco Ltd., Atlanta, and a member of the SEC committee, said he disagreed that rules like trade-through don't impact asset owners and institutional investors,. “From an institutional perspective, trade-through and other market structure rules are all things that institutional investors and everyone should be interested in,” Mr. Cronin said. “These rules could enhance equity trading and, by extension, could help with fixed income and derivatives. All have potential outcomes that all asset owners should care about.”
The composition of the committee also is a cause for concern to Mr. Glass. “I worry that the committee has high-powered names on it — maybe too many. I don't see a real representative from the asset-owner community. There are plenty from exchanges, broker-dealers, academics, money managers — but no one speaking about the people I serve.”
Among those on the 18-member SEC committee are Stephen Luparello, SEC director of trading and markets; Richard Ketchum, chairman and CEO, Financial Industry Regulatory Authority; Andrew Lo, chairman and chief investment strategist, AlphaSimplex Group; Mehmet Kinak, vice president and head of global equity market structure and electronic trading at T. Rowe Price Group Inc.; and Gary Stone, chief strategy officer, Bloomberg Tradebook LLC.
Henri Waelbroeck, director of research at execution management system provider Portware LLC, New York, said the committee should concentrate on fair order types. “The SEC talks about various options, but brokers' algorithms are impacted by providers' profit incentive. There's a bit of danger in that broker-dealers' profit incentive, where profit improves at the expense of institutional implementation shortfall. They (SEC) could come up with ways to reduce broker-dealers taking advantage of institutional investors for profit. They could improve the measure of cost and show how well market structure is working for them.”
Joseph Ratterman, chairman of BATS Global Markets Inc., Kansas City, Mo., and a member of the SEC committee, said he thinks the SEC has created a committee that will take all market participants' interests into account.
“The SEC has done a good job setting the agenda and picking the members to effectively look at all market structure issues. It's not narrowly focused. (SEC Chairwoman) Mary Jo White made it clear that there are three stakeholders being considered: the issuers, retail investors and institutional investors. The SEC will be using the committee to look at all components in a broad, measured way.”