Politician’s Letter to SEC Outlines Market Structure Issues in Equity Trading!




A Washington DC politician has summarized the issues central to the debate around modern market structure in a wonderful letter to the Securities and Exchange Commission. In this letter, this politician has addressed:

–          Fragmentation

–          The focus on spreads as a measure of transaction cost.

–          HFT regulation and registration

–          Liquidity vacuums

This politician actually makes nine suggestions to modernize market regulation and address known problems and weaknesses. These include:

–          Finalize and implement pending rule proposals, such as the proliferation of order flashing and the CAT.

–          Bring HFTs into an effective regulatory regime. This includes registering large HFT firms and monitoring their HFT trading strategies for manipulation, gaming, intent, the danger of “winning strategy convergence”, and the restriction of ISO order types.

–          The allocation of costs based on message traffic instead of volumes.

–          Standardizing the dissemination of market data, modernizing the SIP, and releasing all market data on a time-coordinated basis.

–          Raising the bar to become a market center/exchange. Harmonize rules for market center trading so that ATS’s are on the same framework as Exchanges.

–          Emphasize deep and diverse markets. Rethink which orders should be afforded protection under Reg NMS. Emphasize size of quotations alongside size of the quotes spreads.

–          Re-examine the role of maker-taker, as maker taker pricing distorts spreads and perverts order routing incentives. Examine payment for order-flow in general, and its appropriateness given the conflicts of interest it injects into order execution.

–          Focus on dark volumes – too much off-exchange trading is damaging confidence in public markets. Latency arbitrage created my data feed speed differences allow internalizing dealers to “provide” meaningless price improvement against stale quotes. This amounts to a license to take unfair spreads.

–          Consider lifting the ban on locked markets. If orders at the same price are not forced to trade, then volume on less desirable exchanges will naturally dissipate. Also, lifting the ban on locked markets will take emphasis away from speed.

This letter finally shows that Washington politicians are starting to understand all of the complexity and issues arising from the secondary markets’ plumbing. And now that the SEC has this letter, perhaps they can quickly act on some of these key issues.

Oh wait… this letter was written in August of 2010.