Tags: Levin | SEC | trading | high speed

Sens. Levin and McCain Attack High-Speed Trading Practices

By    |   Monday, 23 Jun 2014 08:09 AM

The Senate Homeland Security & Governmental Affairs Committee's Permanent Subcommittee on Investigations, chaired by Sen. Carl Levin, D-Mich., held a three-hour hearing June 17 titled "Conflicts of Interest, Investor Loss of Confidence and High Speed Trading in U.S. Stock Markets."

Two panels of witnesses presented, first, a study that documents trading practices of asset managers who allegedly work to the disadvantage of investors, then a discussion of the merits of proposed reforms.

All this took place against the backdrop of a pledge by Securities and Exchange Commission (SEC) Chairman Mary Jo White to conduct a thorough study of so-called "Market Structure," the rules and exceptions (there are always exceptions where the SEC is involved) that govern how securities trading is conducted after the revolution that was launched on May 1, 1975, when fixed commissions for trading were abolished.

A cynic would say that the securities industry has never fully reconciled itself to full competition, conducted without a built-in "vig" that would ensure a profitable business model, even at the expense — or especially at the expense — of customers to whom securities brokers owe a duty of "Best Execution" under SEC rules.

Believers in, and apologists for, the culture of the industry contend that customers have never had it so good. After all, the stock market has been on a five-year tear, helped by the explicit backing of the open-handed Federal Reserve policy known as quantitative easing.

However, even industry witnesses acknowledged that investor participation in the stock market has declined from 67 percent of investors owning stock in some form to only 50 percent, and critics attribute this to a lack of confidence in the fairness of the market, as dramatized recently by Michael Lewis's book Flash Boys, and the accompanying 60 Minutes interview that charged the market is rigged against investors.

Levin staged a debate between Robert Battalio, a finance professor at Notre Dame, and Steven Quirk, senior vice president of the trader group at TD Ameritrade, about whether the ability of brokers to obtain rebates from trading venues to which they send high volumes of business conflicts with the duty of the brokers to deliver "Best Execution" to their customers.

Battalio admitted that the data in the study he co-authored could have been better, and part of the controversy was about whether TD Ameritrade had agreed to offer its data for Battalio to study.

Thomas Farley, president of the NYSE Group, came down strongly on the side of reform, a stance that marks a departure from the traditional position of the NYSE due to its acquisition by the Intercontinental Exchange (ICE), a company with a disruptive business model.

In his opening statement, Levin complained that brokers should be working for the best interest of their customers and reforms are needed in the form of legislation, regulation, industry reform or some combination of these.

Quirk admitted that TD Ameritrade made $80 million in a year from the accumulated rebates the firm received, but he insisted this was not at the expense of customers, because on balance, rebates bring competition and liquidity to the market that benefit investors.

Sen. Ron Johnson, R-Wis., stated that as an investor he had no problem with the broker making tiny amounts on his trades as long as orders are filled in a timely manner at the price he expects, which he noted that for him this happens most of the time.

Sen. John McCain, R-Ariz., dismissed the claim of Quirk that investors benefit from the current arrangements. He said, "my friends," that this reminds him of a guy in a small town who said he would play poker on Saturday night. Asked if he liked poker, he answered, no, but it's the only game in town.

All of these arguments will be repeated ad nauseam when the SEC conducts its Market Structure study. At the pace the agency works, this could take five or 10 years.

(Archived video can be found here.)

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Robert-Feinberg
The Senate Homeland Security & Governmental Affairs Committee's Permanent Subcommittee on Investigations, chaired by Sen. Carl Levin, D-Mich., held a three-hour hearing June 17 titled "Conflicts of Interest, Investor Loss of Confidence and High Speed Trading in U.S. Stock Markets."
Levin, SEC, trading, high speed
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2014-09-23
Monday, 23 Jun 2014 08:09 AM
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