In its meeting on April 22, 2010, The Board of Governors of the The Security Traders Association (STA), the leading advocacy and education organization for professional equity traders in the U.S., approved the initial response of the Association to the SEC’s Concept Release on Market Structure. A formal Comment Letter will be issued in due course.
Noting that the equity markets remained stable during the financial crisis of 2008-2009, the Association holds:
- The equity markets are functioning properly, and there are no signs of significant deficiencies or an inability to perform their important functions;
- All investors are protected by regulations that promote efficient market structures and foster competition between and among exchanges, marketplaces, and dealers.
STA believes, however, that at least one major deficiency currently exists in the SEC’s oversight of today's markets. Technology has progressed so far and so fast that the traditional market surveillance systems of the Self Regulatory Organizations have been unable to keep pace. They do not receive market wide data and support regulation on a system wide basis. The SEC needs to develop a National Market Surveillance System, linked to and integrated with the technological surveillance systems of the SROs but independent of them. Regulatory gaps exist today because there is no one regulator with the capacity to technologically observe, examine and evaluate intra- and inter-market trading. The STA is encouraged, however, by recent SEC actions to develop a consolidated audit trail system that would capture customer and order event information across markets. These positions are consistent with the STA’s long held belief in an appropriate balance between regulation and competition.
With regards to the principles guiding market structure, the STA has evaluated the current U.S. market structure against the objectives set by Congress in 1975 for the creation of a National Market System and finds that the Congress’ goals have largely been achieved. Moving forward, the STA believes that certain core principles regarding the interaction between markets and regulation should be applied by the Commission in its consideration of market structure. These are:
- Markets evolve. Periodic regulatory reviews are appropriate and healthy. As noted by the Congressional Oversight Panel in its January, 2009 Report:
The essential debate… [is] between wise regulation and counterproductive regulation. Wise regulation helps make markets more competitive and transparent, empowers consumers with effective disclosure to make rational decisions, effectively polices markets for force and fraud, and reduces systemic risk.
Counterproductive regulation hampers competitive markets, creates moral hazard, stifles innovation, and diminishes the role of personal responsibility in our economy. It passes on greater costs than benefits to consumers, and needlessly restricts personal freedom(1).
- Incremental change is best. The STA has consistently recommended that rules and regulations be changed incrementally to better identify and address any unintended consequences. While markets are dynamic, it is important to implement changes when the market participants are not reacting emotionally. Consequences are easier to identify in stable markets. Changes are best made in stable markets and not during politically charged times or times of financial market unrest.
- Balanced competition and regulation is the correct formula. The SEC has been shepherding the markets toward a truly national market system since 1975, through the promulgation of rules and regulations designed to encourage access and connectivity. In its 2008 White Paper, the STA stated that:
the appropriate balance between regulation and competition yields the best opportunity for achieving a national market system and we believe the SEC’s recent implementation of Regulation NMS was a major advancement in the quest for a national market system because it required access and connectivity, enabling competition(2).
- Regulations should not favor any one business model or platform. Regulations should be "business model neutral" and work to insure only that investors are protected and not disadvantaged by the fiduciaries and other market participants tasked with serving their needs. The SEC should not pick "winners and losers."
- Enforcement. The existing body of market and trading regulations is extensive and comprehensive. Aggressive enforcement of those rules will provide adequate investor protection and increase investor confidence more than the adoption of additional regulations. Investor confidence is damaged by every report of discovered fraud and manipulation but not as much as it is damaged by reports of inadequate surveillance and enforcement of existing regulations by the SEC. The SEC must insure that adequate resources are applied to this mission.
Said Brett Mock: STA Chairman: “For 75 years the STA has been an important voice in market structure because our organization develops consensus responses that take into account the viewpoints of traders from a variety of market segments. We have consistently held that regulation should foster innovation and competition for the creation and sustaining of fair, liquid, and orderly markets. We believe the principles we have articulated should serve as both the driver of market structure regulation and the criteria against which any new regulation be evaluated.”
(1) “Special Report on Regulatory Reform,” The Congressional Oversight Panel, January, 2009, p. 61.
(2) Special Report: The STA’s Perspective on U.S. Market Structure, May 2008, p. 14.
