Consumer Federation of America White Paper on Market Structure


While competition and technology have brought great progress to our equity markets, the pendulum has swung too far. Excessive competition has resulted in a market that is unnecessarily complex, fragmented, lacking basic transparency mechanisms, and ridden with conflicts of interest; and, the technological arms race has led to trading activities that disadvantage long-term investors, expose the financial system to excessive risks, and shake investor confidence.


WOW. That is some sentence!

The Consumer Federation of America is a non-profit in Washington DC that advocates for the public good on a host of varied issues that include cable company monopolistic mergers,  faulty consumer products (like bed rails and magnetic toys), payday loans, and even equity market structure. You can learn more about them on their website here, or on some of their social media presence – like Facebook – here.

One of their staff was kind enough to email us yesterday, and alert us to a white paper they had just released, titled Changes to Equity Markets Require Structural Reforms. It was written by Micah Hauptman, and we want to make sure you get a chance to read it. It is well-researched, straight forward, and filled with a “common sense” perspective of a thoughtful industry outsider – as opposed to insider.

Often we find market structure pieces written by outsiders to miss the mark a tad, despite their meaning well. It is not so easy to research and learn the nuance and detail that is pervasive in complex equity markets. This is why the first place we look when reading such a research piece is the footnotes. The above referenced CFA piece does not disappoint; the footnotes include important books, varied newspaper articles, varied academic research, SEC rule filings, Senate testimonies, and SEC speeches.

The white paper primarily addresses four issues:

1)      Too much off-exchange trading is deteriorating equity market quality. The transparency is lacking, and the conflicts of interest are notable. A Trade-At Rule should be implemented.

2)      Maker-Taker and payment for order flow have created too many conflicts of interest for brokers, and too much complexity in the markets in general. At a minimum, there should be an SEC Pilot Program to eliminate maker-taker.

3)      Market integrity is harmed when we allow traders to receive market data at different speeds. More needs to be done to insure there is no favored access.

4)      There is good and bad HFT. Good HFT should be rewarded with extra incentives to provide liquidity. Bad HFT (manipulative and predatory) needs to be understood and rooted out and punished.


Mr. Hauptman shares many of our views on market structure, and differs on some as well. For example, we believe all payment for order flow should be abolished; Hauptman believes it is harmful, but can exist as long as more meaningful price improvement is passed along (i.e. the payments are shared with end investors more). While PFOF was pioneered by folks like Bernie Madoff in a regulatory environment that was trying to encourage competition against NYSE, today the environment is quite different – in our view the rationale for PFOF is just not there except to defend billion dollar business models.

You will recognize many of the issues in Hauptman’s white paper. Likely, you will agree with most of his assessments and recommendations.

We think the paper strikes a great balance between being “meaty” enough to demonstrate how well researched it is, and simple enough so that it is a great paper to pass along to those in your organizations who are itching to learn more about equity market structure. Please give it a read! We enjoyed it and will be passing it along ourselves.