“As we work to reform our financial markets, we could learn a lesson from the auto industry.”
from Traders Magazine Online News, July 17, 2014
by Jim Toes
A long-established industry. Known for high standards, game-changing innovations and the ability earn returns for long-term investors while becoming a cornerstone of a growing nation. And it almost crumbled last decade.
It’s easy to forget that the U.S. auto industry was weakened to the point of collapse at the beginning of the millennium. According to “American Icon: Alan Mulally and the Fight to Save Ford Motor Company” by Bryce G. Hoffman, the auto giant was in disarray: Ford’s operations were divided and spread over too many non-core brands in the early 2000s; it found itself chasing unprofitable market share and often lost to Toyota in sales and ratings. In short, the auto giant had lost its focus on building quality cars and trucks that Americans wanted to buy.
“…there has never been a more important time for traders to educate themselves on the issues and make their views known. The coming months and years will be critical in how our markets are reformed. In our recent meetings with U.S. regulators and legislators, we have seen great interest in views that are well vetted by practitioners and are both granular and principle based.”
Fortunately, even before the financial crisis arrived in 2008, new CEO Alan Mulally had begun turning things around inside Ford. The former Boeing CEO and his team unified operations and took steps to reform Ford’s culture. As the financial crisis deepened, there were doubts about whether these “getting back to basic” changes would succeed. But by continuing to take steps that were difficult but directionally positive, Ford not only weathered the crisis — one that required a bail out for its chief rivals GM and Chrysler — but emerged stronger.
In recent years, our own financial services industry has faced not only that same financial crisis, but also a series of issues that have lingered without resolution. Starting with the Flash Crash in 2010, questions about high-frequency trading, dark pools, market fragmentation and system outages arose in earnest. While our equities and options markets are still widely considered the most liquid in the world, these issues – which go to the heart of our market structure – still need resolution.
This leads a person to ask as to whether our business has lost sight of the interest of our end customer – the individual investor – and our larger purpose of capital formation. Do we need to get back to basics ourselves? If you’ve followed this debate in the news or have been an active participant, it is easy to become frustrated by the apparent lack of progress.
Changing Course
If you take a step back, however, it is clear that change is finally afoot. Our industry comprises many firms and individuals – not a singular organization like Ford – so there is no one plan to turn around a single investment firm or exchange. Instead there are a number of developments that, taken together, are encouraging and merit our continued involvement and support. These developments can be seen in a variety improvements recently made by the financial community. They include:
Systemic Risk Implementations – as seen in the introduction of Limit Up/Down, Market Wide Circuit Breakers, Sponsored Access and now Regulation SCI.
Transparency – as evidenced by the FINRA’s recent move to provide free to the public trading data it collects from alternative trading systems, a.k.a. dark pools. Increased disclosure is a step toward greater public understanding of our markets, a prerequisite for investor confidence.
Qualitative and Quantitative Data Collection – as seen in the SEC’s Market Structure website, which is supported by its Office of Analysis & Research staff.
Leadership – The SEC has signaled that they intend to perform a holistic review of market structure. In a recent speech, Chair Mary Jo White outlined several initiatives to address market instability, high-frequency trading, fragmentation, broker conflicts, and market quality for smaller companies. Various aspects of these measures will be debated, but there should be no doubt about the SEC’s serious tone and bias toward action.
Legislative action – Our Congressional representatives are now shifting their focus from crisis reforms to market structure. In June and July, Senate and House committees have held hearings on the issues discussed earlier in this article. Renewed legislative interest in these issues will help ensure that any solutions keep the public’s interests first and foremost.
Lastly, and perhaps most importantly, there has never been a more important time for traders to educate themselves on the issues and make their views known. The coming months and years will be critical in how our markets are reformed. In our recent meetings with U.S. regulators and legislators, we have seen great interest in views that are well vetted by practitioners and are both granular and principle based.
Just as Ford’s Mulally succeeded by engaging his workforce in a renewed collective mission, we as market professionals have an obligation to do our part to get our business back on the road toward a brighter future.