Switching Chairs at SEC Delays Market Structure Changes

Author: Tom Steinert-Threlkeld
Source: Traders Magazine;

CHICAGO -- President Obama's nomination of Mary Jo White to be the next chairman of the Securities and Exchange Commission brings delay and uncertainty about how equities markets will operate, for the long haul, according to participants in industry discussions here Thursday.

The uncertainty and delay will keep institutions from investing and dampen trading activity, according to Bob Fuller, chief administration officer at Fixnetix, which provides market data and infrastructure services for high-speed trading.

"Until about 10 a.m. this morning, we had a chairman that we thought was going to be around, for a while," said Brendon Weiss, vice president of legal and government affairs for NYSE Euronext.

Then, President Obama nominated Mary Jo White, who gained prominence prosecuting terrorists as U.S. attorney for Manhattan, to be chairman of the Securities and Exchange Commission.

Confirmation of White, Weiss noted, is likely to take months. And her nomination comes just two months after commissioner Elisse Walter took over as chairman.

Walter took over when President Obama's first chairman, Mary L. Schapiro, stepped down, after nearly four years in the post. Schapiro, during that time, initiated a wide range of reforms, including ends to so-called naked access to electronic markets and "stub quotes” as well as introduction of new single-stock and marketwide circuit breakers after the Flash Crash of 2010. She also was responsible for implementing a wide range of new rules mandated by the 2010 Dodd-Frank Wall Street Reform Act, which remain on the regulator's task list.

With Walter already in lame duck status while White, a litigator and partner at Debevoise & Plimpton LLP in New York, goes through confirmation hearings, most changes that the SEC is trying to push likely will slow down, market professionals at the Security Trader Association mid-winter conference here said.

In limbo, said Weiss: Any sort of serious market structure change. "This kind of throws it for a loop," he said. "I wouldn't expect to see more roundtables on market structure or rules pertaining to Dodd-Frank” or the Jumpstart Our Business Startups (JOBS) Act.

Technical disruptions such as the 2010 Flash Crash and the spate of snafus that characterized 2012 and peaked with the Aug. 1 flood of erroneous orders that nearly undid Knight Capital Group also have lead to delays in long-term market structure change, in the electronic trading era.

"One of the things that got lost” in all the attention was a well-thought out 74-page market structure concept release that came out of the SEC in January 2010, according to Steve Sachs, head of capital markets at ProShares.

That release sought industry comment on how to create metrics that effectively tracked "market quality,” ensured fairness of highly automated markets, look at whether any high-frequency trading practices needed regulation and whether such developments as dark pools and co-location of trading equipment under the same roofs as the matching engines of exchanges needed review and possible regulation.

The document did "a good job of laying out market structure issues," but got forgotten after the Flash Crash hit, he noted. And, instead of a holistic approach to markets, he and Weiss said regulators and Congress have taken a more "piecemeal” approach to market issues.

"I kind of fear that will make markets more complex," rather than clearer, said Phil Mackintosh, managing director of investment banking for Credit Suisse in New York.

And delay only makes it worse. Abe Kohen, a developer for trading systems supplier Flextrade, cited the industry's attempts to implement price bands on stock trading, under the so-called "limit up, limit down” rules that the SEC mandated as a second wave of circuit breaking after the Flash Crash.

He waved a four-page document full of acronyms that was one company's explanation of how to carry out the rules, in their systems. The jargon- and acronym-filled pages defied understanding, he said.

‘If anybody really understood this, I would be really surprised," he said.

With the chairmanship up in the air, companies won't be investing in new ways of trading, said Sebastiaan Koeling, managing director at Optiver.

And the emergence of a litigator at the top of the SEC also could freeze market players.

The SEC is likely to follow the lead of the Commodity Futures Trading Commission, said John Superson, managing partner of Sumo Capital in Chicago, and pursue rule-making that could force chief compliance officers to confirm that his or her firm is in compliance with all laws and regulations – and stand to take personal liability if not.

"My fear is making CCO's personally liable for any failures or violations of the firm," he said, will make it hard to find talent to fill the role.

"People would rather sail off into the sunset and sell sweaters on eBay," he said.

And if a firm indemnifies the CCO, regulators will be less likely to settle cases, the market participants said.

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