GOLDMAN SACHS: The SEC should review stock exchanges for conflicts of interest

Goldman Sachs thinks the US Securities and Exchange Commission should conduct a review of public exchanges.

In a letter to the SEC supporting the exchange application filed by IEX, managing director Paul Russo expressed concerns over the “public operations of exchanges and the operations of their affiliated routing broker-dealers.”

IEX is the trading venue made famous by Michael Lewis’ ‘Flash Boys.’ It uses a “speed bump” to try and level the playing field between hyper-fast traders and others.

Here is the key passage:

With the adoption of Regulation NMS, exchanges established broker-dealer routing entities as a means to route to protected markets in compliance with Rule 611.

Since that time, these exchange-affiliated routing broker-dealers have continued to expand their service models, notwithstanding their regulatory status as facilities of exchanges. As highlighted in various letters filed by the Securities Industry and Financial Markets Association (“SIFMA”), this regulatory disparity has led to perceived conflicts of interest, blurring the distinction between the public operations of exchanges and the operations of their affiliated routing broker-dealers.

For example, we are concerned that exchange-affiliated routing broker-dealers may have access to and use the proprietary market data of the exchange to benefit their own order routers.

Consistent with the themes raised by the industry in the SIFMA letters, we urge the Commission to undertake a review of the structure and operations of exchanges to ensure that there are adequate regulations enforcing the arms-length separation between their operations as public exchanges and those as non-public broker-dealers.

More to follow

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