This morning we were going to share a first-account-trading-war-story that perfectly captures the absurdity created in our markets from payment for order flow, and specifically stock exchange rebates. However, a jaw-dropping speech from one of our new SEC Commissioners, Robert Jackson, presented itself as a perfect stage-setting opportunity. This morning we highlight that speech instead, and next week we will share our war story.
The winds of change are most certainly around the bend. Summer ends today, and in the not-so-distant-future the gales of October will turn into the chilly winds of November. After those chilly November winds – after we give thanks for all of our blessings – the Christmas Holiday Season will commence. Subsequent to that, market structure reform is going to rain down like reality on a New York Mets season.
“Christmas is over, and business is business.” – Gordon Gekko
A few days back Commissioner Robert Jackson gave a speech in Washington DC that you all need to read. It’s titled Unfair Exchange: The State of America’s Stock Markets.
In it he takes on the questionable behavior of our stock exchanges, and the conflicts embedded in maker-taker, in a such a direct and hard-hitting way, we are tempted to think that he almost does not want to go work at stock exchange or at Citadel down the road.
Here are a few extracts:
- “Market participants will follow the economic incentives we give them. Given power and a profit motive, even the most storied institutions will do what they must to maximize their wealth. And nowhere has this been more true than in our stock markets.”
- “The SEC has stood on the sidelines while enormous market power has become concentrated in just a few players. That’s a key reason why among our 13 public stock exchanges, 12 are owned by just three corporations…. What is clear is that their profit motive gives exchanges every reason to structure stock markets in a way that maximizes their rents.”
- “The SEC have struggled to keep up. Our oversight of the stock markets has drawn understandable criticism from market participants and the federal courts. They wonder why we allow conflicts of interest in this area to persist, and why basic principles of competitive economics don’t govern our review of exchange demands. And so do I.”
- “ It’s time to put the “exchange” back in the Securities and Exchange Commission.
- “We saw no reason to think that exchanges couldn’t play the role of regulator and pursue profit at the same time. Maybe we were wrong. Whatever one thinks about the benefits or drawbacks of those events, we should all agree that for-profit companies can be counted on to do one thing: pursue profit. And in for-profit hands, SEC oversight designed for not-for-profit exchanges can be dangerous.”
- “The exchanges run the public feed. And, at the same time, the exchanges sell private data feeds.. It’s like letting Barnes & Noble run our public libraries. Nobody should be surprised to find that our libraries don’t have enough books.”
- “Why do we have so many exchanges, only to have nearly all of them owned by three corporate parents? I understand, of course, why a company would buy and absorb competitors with the same business model. It’s harder to see why a company would acquire, and then continue to operate, virtually identical businesses. One reason our exchanges do this is so they can charge investors to connect to each exchange.”
- “Now, we at the SEC can disapprove proposed price increases for connecting to our stock exchanges. In a world where the costs of electronic connections are constantly falling, exchanges have asked us to raise these prices over and over again during the past three years. Unfortunately, we have stood on the sidelines. In fact, my staff reviewed all ninety-nine times exchanges have recently changed their connectivity practices, and not once—before this week—have we taken action to stop them.”
- “To nobody’s surprise, research shows that brokers very often send their orders to the exchange that gives the broker the biggest rebate. In the years since this practice was first brought to light, little has been done to bring transparency to the effects of these payments. It’s time for that to change.
With this speech, Commissioner Jackson has arrived! He has taken his shirt off, and is sporting an Elon Musk flamethrower.
We do believe change is coming, and it can’t be stopped, no matter how many Anti-Access Fee Pilot comment letters NYSE gets some of its issuers to write.