Tags: Senate | market | structure | HFT

Sen. Warner Holds 'Me-Too' Hearing on Market Structure

By    |   Tuesday, 24 Jun 2014 07:54 AM

Take a best-selling book that is launched by a 60 Minutes interview, add 2 ½ months and what do you get? The answer is, congressional hearings.

On June 18, the Senate Banking Committee's Subcommittee on Securities, Insurance and Investment, chaired by Sen. Mark Warner, D-Va., held a hearing titled "High-Frequency Trading's Impact on the Economy." The panel consisted of Hal Scott, a noted Harvard law professor, and two industry witnesses, Jeffrey Solomon, CEO of Cowen and Co., and Andrew Brooks, head of U.S. equity trading at T. Rowe Price.

In his opening statement Warner mused that he had been "front run" by Sen. Carl Levin, D-Mich., who held a strikingly similar hearing the previous day in the Senate Homeland Security & Governmental Affairs Committee's Permanent Subcommittee on Investigations. The hearings were even more similar given that the Warner hearing touched only lightly on high-frequency trading (HFT) and on the economy and headed straight for the "Market Structure" issues that Levin had developed the previous day. Sometimes congressional committees resolve these circumstances by holding joint hearings, but just consider it your tax dollars at work or ask, is this a great country or what?

Warner endorsed a proposed pilot program to test the effect of increasing tick sizes in hopes of improving access by small-cap companies to capital markets. This idea has also been strongly promoted by witnesses Scott and Solomon. Warner chastised the Securities and Exchange Commission for being slow to implement the project of creating a consolidated audit trail to improve the data available for the regulators who are supposed to supervise the financial markets.

Sen. Mike Johanns, R-Neb., also endorsed the tick size pilot and noted that a bill supporting the program passed the House by a 412-4 vote. He declared that the markets are not rigged but allowed that Market Structure issues are still important. He praised the operators of equity markets for their achievements in employing technology to reduce costs, much as he has witnessed in agriculture. Johanns warned would-be reformers that it is important to understand the consequences of change, who the winners and losers will be, "because at the end of the day there will be consequences."

Prof. Scott largely agreed with Johanns that the markets are not broken. However, he advocated a few changes, such as strengthening circuit breakers in order to prevent flash crashes, removing the immunity from liability of self-regulators of trading platforms and implementing the consolidated audit trail.

Solomon devoted most of his statement to endorsing the tick-size pilot on the ground that small-cap companies have lagged the market, as they represent only 2 percent of volume and 30 percent of institutional holdings.

Brooks served as the spokesman for the view that HFT and other predatory practices have flourished under the complex model that has developed under Regulation National Market System. He branded these practices unfair and unethical and called for closing of whatever loopholes enable these practices, as well as a pilot program that would test how markets would react to the abolition of rebates and to giving preference to trades that display quotes at which the market participant who posts them is willing to consummate a trade.

Scott nixed Brooks' pilot proposal, saying that markets would be confused if there were too many pilots. From his standpoint, the pilot he and Solomon support should go forward in preference to the Brooks proposal. This could set off a contest, but it looks like Scott and Solomon have a head start.

(Archived video and witness statements can be found here.)

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Robert-Feinberg
Take a best-selling book that is launched by a 60 Minutes interview, add 2 ½ months and what do you get? The answer is, congressional hearings.
Senate, market, structure, HFT
592
2014-54-24
Tuesday, 24 Jun 2014 07:54 AM
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