A change in administration and at the helm of the SEC typically encourages conversation about regulatory reform.
How much regulation is too much, what assumptions are worth reexamining, and how can the government make sure that innovative ideas have a chance to succeed and at the same time protect investors and market integrity?
Those questions are core to the evolution of everything from the blockchain to robo-advisers, and they also matter a lot to how our stock markets evolve.
I have been in the middle of many debates about regulation and innovation, both as a senior staffer at the SEC, and more recently at IEX, a new stock exchange backed by some of the largest fund managers in the world.
When I was at the SEC, much of my time was spent listening to stakeholders of every type argue for less regulation (if that would help their business) or sometimes more regulation (if that would help it more). Usually, the arguments were well prepared and sounded reasonable, and more often than not the argued-for result was pitched as necessary to safeguard market fairness and efficiency, and the public interest in general.
While at IEX, I’ve seen a lot of the same parade of arguments during our long battle to win approval as a national stock exchange. Our fight was especially intense because we offer a completely different model from that used for years by all the big exchanges.
We received overwhelming support from investors, large and small, and much of the industry. In contrast, the big exchanges and a segment of the speed trading world tried their best to derail our exchange approval. They didn’t stand to gain much by opposing simple pricing, free data and uniform access, so they attacked our “speed bump”, claiming it didn’t comply with the rules, would make market quotes unreliable, “unfairly” hurt the speed traders, and would lead to a raft of new speed bumps that would add endless complexity and chaos to the equity markets.
The SEC listened (patiently) to all the arguments and ruled that the speed bump did not pose a threat to market integrity but instead was consistent with investor protection and the public interest.
At the same time, it said that delays longer than IEX’s, or those that were applied in a discriminatory way, might pose an issue under the regulations, and any other intentional delay would need to be fully vetted and considered on its own merits. Most important, our approval meant that an exchange that did not rely on speed-driven access privileges, rebates paid to attract business, data fees, and freakish order types would have the chance to compete.
We have been operating as an exchange for over four months, and chaos has yet to descend on the world. Market prices are not less reliable, and trading continues as before with the exception that brokers and their investor customers can now choose a stock exchange that puts their interests first. In fact, publicly available trade data shows that IEX ranks higher in execution quality over other exchanges.*
Recently, the Chicago Stock Exchange (CHX) proposed its own 350 microsecond speed bump, but would impose it on only some types of orders (those looking to trade with displayed quotes), while allowing the same quotes to be changed or canceled without delay. In essence, CHX designed a discriminatory delay in an effort to protect market makers from losing the speed race to competing traders.
Now some of the same IEX detractors are using the CHX proposal to repeat their doom and gloom predictions about IEX. This is just the start of the chaos we predicted, they moan. Public, beware!
But the predictions are still baseless, as is the comparison. The CHX idea is fundamentally different from the IEX speed bump. CHX’s speed bump is applied to specific types of traders to benefit other traders, while IEX’s is equally applied to every broker, trader, market maker, and candle stick maker. The SEC recognised this simple point and made it clear that a different kind of design would pose a different set of questions. To equate the two speed bumps is a bit like calling for a ban on the iPhone 7 because Galaxy Note 7s have been known to catch fire, and both are called “smart phones”.
Enough about CHX. What bothers me more is the renewed effort to dredge up the same discredited fears about the IEX decision and then to try to disguise those arguments under the sheep’s clothing of a concern for the public interest, maybe in the slim hope that a new regime at the SEC will be more receptive.
We all rely on an expert, independent regulator to separate fact from fiction, self-interest from the public interest, and to think carefully about how to draw the line between useful innovations that drive economic growth and spaghetti thrown at the wall. The questions it confronts are complicated and consequential. By all means they should be subject to a vigorous debate with all viewpoints considered.
But I learned a long time ago, when someone tells you they know what’s in the public interest, take a close look at how they make money, and how many members of the public are vouching for them.
* For example, see “Execution Quality” statistics (accessed on Jan 24, 2017).
John Ramsay is Chief Market Policy Officer at IEX Group. He was also previously Head of Trading & Markets at the SEC.