My first statement is: Do no harm. The markets are complex and inter-related. Small changes can cause significant impact.
Do nothing radical. A radical shift of market structure will hurt investors. Radical changes provide incentives to traders to analyze rule changes and profit off them. This will only cease once investors’ pressure brokers and brokers develop better counter measures. This can take years.
What I Would Do
1) Defragment the market. While we don’t want to limit competition too much, 13 equities exchanges, 50 or so ATSs, and who knows how many internalizing brokers is too many.
a. Stop granting new exchange and ATS licenses immediately.
b. Determine the optimal number of exchanges, ATSs, and internalizing brokers and as these entities go bankrupt, merge, or consolidate reduce the number of licenses.
2) Manage broker / ATS solicitations. Understand what happens to institutional orders is difficult. An order for 50,000 shares can easily be executed in 200 trades across various venues. While institutions typically receive execution information, it is more difficult to tell them where their order was routed and not executed. This information may be more important than where the order was executed. Order information can be leaked to many firms before it is executed. Between brokers soliciting the other side, ATSs routing to each other, and exchanges routing to ATSs – virtually all professionals that may have wanted to trade against this order will have seen it before it is finally executed.
3) Better manage Minimum Price Variations (MPVs or spreads). Currently we have a minimum of 1cent MPV for stocks over $1. I would follow the direction of the JOBS Act in implementing a test program to widen the spreads for less liquid and smaller capitalized stocks.
4) Provide greater transparency of order types and routing mechanisms. Currently most exchanges post their order types, however these descriptions are not intuitive. Exchanges, ATSs, ECNs, internalizers and even brokers need to begin to provide greater transparency, descriptions, and concrete examples of how each order type works, how fees/rebates are generated, where in the order book they show up, how and when they routed, and how these orders change under various market conditions.
5) Quickly develop a market wide consolidated audit trail for equities, futures and options. Develop incentives that will facilitate the cooperation of the SEC, CFTC, and various SROs to ensure harmonious oversight.
a. Develop clear rules on what is manipulative behavior in electronic markets.
b. Provide regulators the tools and people who can understand the market, find the people and/or machines that are driving manipulative behavior, and give the regulators the power to stop, fine and possibly jail manipulators.
c. If we had confidence that our regulators were able to effectively police the market, it would give the public more confidence that pernicious behavior was being flagged, challenged, and resolved. It would provide investors with the assurance that our markets are safe again for trading, investing, and raising capital.
I would like to thank the chair and the committee for allowing me to present TABB Group research and my personal thoughts on how to fix the US Equities Market Structure. If there are any questions I would enjoy answering them at this time.
Click here to view footage of the hearing.
Click Here to read the full written testimony.