In the early 1990’s some of the companies on Nasdaq did not print to the tape. This meant that investors only saw a top-of-book quote and total volume from the previous day. One of these companies was a biotech firm with the ticker ALBM. In the early days of my career I was a market maker in ALBM and the ability to operate in the dark made it fairly easy to be profitable.
ALBM eventually graduated within Nasdaq to become a real time trade reporting security. This provided investors with greater transparency into how much volume was trading intraday and at what prices. For my own self-interests, I was not happy with this development because I believed the increased transparency was going to make it much harder and less profitable to trade ALBM.
My boss at the time, Jackson “Jack” Bayer tried to assure me that things would work out. The new trading regime was better for investors and, according to Jack, when conditions improve for investors Wall Street finds a way to strive. Jack did not offer any empirical data or details to support his statement, just 25 plus years of experience. His words were empty to this sophomoric trader and did little to change my opinion that my conditions would deteriorate for the benefit of investors.
Over time, Jack’s prophecy began to appear. The real time trading regime brought in new investor classes which translated to more volume and efficiencies became available that enabled market makers to process more volume. What started out as an improved condition for investors with unforeseen benefits for myself resulted in a positive outcome for all parties.
This is a simple story, but it none the less describes a scenario that plays out on Wall Street over and over, again. Wall Street strives when conditions for investors improve however, when we as individuals or firms are unable to see how the benefit to the investor translates to a benefit for ourselves, then our initial reaction is to protect the status quo.
SEC’s Focus on Equity Market Structure
In an April 10, 2018 speech
, SEC Chairman, Jay Clayton laid out three areas of focus for the Commission’s Trading & Markets Committee with regards to equity market structure: address the challenges associated with liquidity for thinly-traded securities;regulatory approaches to addressing retail fraud; and access to markets and market data.
In that speech, Chairman Clayton referred to recommendations by the SEC Equity Market Structure Advisory Committee and the U.S. Department of Treasury’s white paper on Capital Markets as primary resources for identifying these specific areas. Chairman Clayton also described how the use of public roundtables and comment letters would provide the means for obtaining industry input used towards determinations of future rule making.
Since his April speech, the Commission has held roundtable discussions and opened comment letter folders on the first two areas; thinly traded securities and addressing retail fraud.
This Thursday begins a series of panels on the third, and most contentious issue, of market data and market access. While market structure issues are not on the agenda, it is widely believed that such topics as the order protection rule, transaction fees, unlisted trading privileges, Regulation ATS-N and others will be brought up soon and often.
How panelists frame their opinions and recommendations will be fully transparent to the industry and investors will then be afforded the opportunity to offer comments.
Our chief regulator is clearly demonstrating an interest in examining large parts of our market structure. Even though the Chairman has demonstrated an open mind and a guiding principle, or true North, that determinations will based on the needs of the investor, market participants are concerned with the Commission’s review because it may result in change and change as we all know is disruptive and carries with it uncertainty.
Having the interests of investors is something we all attest to, but as human beings the temptation to protect our self-interests is a natural response when we do not see how the benefit to the investor will benefit us. It is also natural for parties who are being harmed to use dubious claims of knowing what is best for investors in order to change the status quo for their own benefit.
As our industry goes into this week’s roundtable, we would all be for the better to do so with clear eyes and a certain amount of faith in time tested and principle based decision making like the one offered by Jack sometime ago, when conditions improve for investors Wall Street finds a way to strive.
“…focus on market structure issues will, as always, start and end with ensuring that our markets meet the needs and serve the interests of our long term Main Street investors.”
Jay Clayton, Chairman
US Securities & Exchange Commission