Defining Rules of Road for Computerized Trading
December 18, 2012
“In the case of Nasdaq, it took six years. Exchanges alone adopt member and market regulation rules, develop automated surveillance systems to detect rule violations, and discipline broker-dealers that violate rules and harm investors,” he stated.
“Congress recognized that enforcing rules in U.S. securities markets is so important that two regulators rather than one are needed to enforce them. Congress codified the authority of exchanges to act as self-regulatory organizations (SROs), to set and enforce trading rules and to halt trading during extraordinary national or international events. SROs supply the SEC and other regulators vital information about the trends and performance of U.S. capital markets. The SEC is our partner in protecting investors,” Noll said.
Mathisson of Credit Suisse took an opposing view, noting that exchanges have unfair advantages over brokers. Credit Suisse is exploring ways to gain acceptance for its Light Pool as an exchange.
For instance, the Consolidated Tape Association distributes $400 million in market data revenues to exchanges after operational and administrative expenses have been paid. “The enormous revenues from market data are way out of proportion with the costs of exchanges’ self-regulatory responsibilities. Market data revenue has simply become a government-granted windfall at the expense of the investing public,” Mathisson said.
His recommendation: Remove the self-regulatory status of the for-profit exchanges. “For-profit entities should not be shielded from liability for damages that arise as a result of their own actions,” he said. “ For-profit entities should not be able to audit and regulate their competitors. Exchanges have already transferred most of their regulatory tasks to FINRA (the Financial Industry Regulatory Authority). It is time for Congress to revoke their special quasi-governmental status and government privileges.”
Gasser and Mecane also stressed the need for the Consolidated Audit Trail, proposed by the SEC. “It is a vital component to ensuring effective surveillance in a highly fragmented marketplace,” said Mecane. “Such surveillance should include better identification and reporting on high frequency trading, similar to that being discussed by the Commodity Futures Trading Commission, to increase the transparency of this practice.”
“The SEC’s Consolidated Audit Trail, if implemented properly and cost effectively, will give investors confidence that regulators can police bad actors and predatory strategies,” added Gasser.