Abstract
We can safely assume market structure is a moving target, constantly in a state of flux. Some would agree that US market structure is the eighth wonder of the world. And yet others might think it is simply a broken toy of the regulators or, indeed, of the financial services industry at large. In this light, let me start by asking the panel for their top one or two regulatory wishes, or thoughts about change.
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Notes
- 1.
The Security and Exchange Commission’s (SEC) crowdfunding plan is a requirement in the 2012 Jumpstart Our Business Startups (JOBS) Act, a 2012 law to spur job growth and, at the time of writing, to permit small business owners to raise as much as $1 million through unaccredited investors
- 2.
Referring to an SEC program designed by Tradeworx of Red Bank, NJ, to help monitor and track suspicious trading activity. See To Regulate Rapid Traders, SEC Turns to One of Them, Nathaniel Popper, Ben Protess, New York Times, October 7, 2012. http://www.nytimes.com/2012/10/08/business/sec-regulators-turn-to-high-speed-trading-firm.html
- 3.
Since the conference, Chris Concannon left Virtu Financial. He was named president of BATS Global Markets in December 2014, assuming the additional role of CEO of the company in February 2015.
- 4.
Referring to the lack of liquidity in certain stocks including smaller names that do not have the same level of market maker support in the kind of highly automated, high-speed, and fragmented markets the speaker indirectly describes.
- 5.
In August 2013, Direct Edge Holdings, operator of Direct Edge, and BATS Global Markets announced their plans to merge under the BATS moniker in an all-stock transaction. The deal closed in early 2014. The owners of the new, merged entity included Goldman Sachs, Morgan Stanley, Credit Suisse and Citadel, Citigroup, and KCG Holdings.
- 6.
With regulatory changes and the advances in electronic trading, institutional stock trading commissions continued to shrink in the years prior to this conference. In fact, 2012 saw broker fees for US stock trading decline to their lowest levels since 2006, driven in part by outflows from stock funds but also because of electronic trading coupled with the contraction in trading commissions, generally.
In 2006, the average rate for trading a New York Stock Exchange-listed share declined to 3.9 cents a share from 4.2 cents last year, according to Greenwich Associates. The average for a Nasdaq Stock Market trade dropped to 3.8 cents from 4 cents. See Broker Fees for US stock trading fell to lowest since 2006. http://www.bloomberg.com/news/articles/2012-05-31/broker-fees-for-u-s-stock-trading-fell-to-lowest-since-2006
- 7.
For example, there was the reported Nasdaq price-fixing scandal of the late 1990s, a scandal which resulted in a class-action lawsuit and a $910 million settlement by 30 securities firms.
- 8.
Basic order types include market, limit, and stop. Trading platforms today permit traders to use a multitude of other order types.
- 9.
Notably, Nasdaq’s proposed “limit up-limit down” rule in 2011, coming in response to concerns on market volatility, was intended to prevent trades in National Market System securities from happening outside of specific price bands.
- 10.
See SEC asks exchanges, FINRA to submit “tick size” pilot plan, Reuters, Supriya Kurane, June 25, 2014, http://www.reuters.com/article/2014/06/25/sec-pilotprogram-trading-idUSL4N0P61HV20140625
- 11.
This is the minimum period of time an order must “rest” on an exchange to remain “valid” as in the case of a proposal, for example, by the European parliament in 2012, which sought to introduce a minimum resting time of at least 500 milliseconds for orders to remain valid on an exchange. This resting period was in response to the rapid fire and controversial aspects of high-frequency trading.
- 12.
ELX Markets, formerly ELX Futures, launched in 2009, was no longer active as of writing in 2015. Wolkoff was a former CEO at this electronic futures exchange with its headquarters in New York City.
- 13.
See Facebook IPO: What the %$#! happened? Julianne Pepitone, CNNMoney, May 23, 2012, http://money.cnn.com/2012/05/23/technology/facebook-ipo-what-went-wrong/index.htm
- 14.
The BATS IPO was scrapped after a software glitch sent its shares plunging to a fraction of a cent within seconds of the attempted IPO on March 23, 2012.
- 15.
The Flash Crash of May 6, 2010, lasted about 36 min, erasing 998.5 points or about 9% in the Dow Jones Industrial Average, and then quickly recouping the losses as the various indexes rapidly rebounded in this high-speed, electronic trading phenomenon. At the time, it was a record one-day point decline on an intraday basis in the history of Dow Jones Industrial Average.
- 16.
Price of the stock (Nasdaq: KRFT) surged 25% within 1 min soon after the market opened. The glitch was blamed on a broker error by Nasdaq that affected multiple exchanges. “Investors were hit with another stock-trading glitch Wednesday, this one in a household name – Kraft Foods – which saw dozens of trades canceled when a broker error caused shares to soar shortly after the opening bell,” according to The Wall Street Journal. See WSJ story, Kraft Hit by Trading Glitch, October 3, 2012, Alexandra Scaggs and Matt Jarzemsky.
- 17.
Referring to the “risk” differences between a “defined contribution plan,” or a 401(k), as it is commonly called vs. the traditional defined benefits which, in effect, “guarantee” participants pension payouts in retirement, regardless of market conditions. The former 401(k)s have hugely overtaken the latter plans in terms of participants in recent years.
- 18.
Spoofing is the controversial trading practice of placing orders and then quickly canceling them, creating an “illusion” of up or down market movements.
- 19.
See footnote 7.
- 20.
For more, see The JOBS ACT: A New IPO Playing Field for Emerging Growth Companies. Goodwin Procter April 25, 2012. http://www.goodwinprocter.com/Publications/Newsletters/Client-Alert/2012/0425_JOBS-ACT-A-New-IPO-Playing-Field-For-Emerging-Growth-
- 21.
See Market 2012: Time for a Fresh Look at Equity Market Structure and Self-Regulation Commissioner Daniel M. Gallagher, SIFMA’s 15th Annual Market Structure Conference, Oct. 4, 2012 http://www.sec.gov/News/Speech/Detail/Speech/1365171491376
- 22.
Demutualization is the conversion of an exchange from mutual status – a member-owned exchange – to ownership by a private or public company. The New York Stock Exchange demutualizated in 2006 when it becomes a for-profit, publicly traded company. And as noted by one analyst, this gives the exchanges an incentive to start managing for profit and the brokers an incentive to become more competitive.
- 23.
As of August 2015, there were 11 US stock exchanges, according to a Reuters report.
- 24.
The Financial Industry Regulatory Authority.
- 25.
See footnote 11.
- 26.
For instance, in a letter to the Securities and Exchange Commission dated August 2012, Citigroup claimed that decisions made by Nasdaq, the second-largest US equity trading venue, in the IPO were aimed at protecting profits rather than member firms. “Market participants suffered hundreds of millions of dollars of losses as a result of Nasdaq’s profit-driven conduct prior to and during the Facebook IPO, not as a result of protected regulatory activity by Nasdaq, or routine system failures,” Citigroup wrote. “Nasdaq should not be permitted to hide behind regulatory immunity.”
- 27.
As of writing in 2015, there were reports about BATS aiming to make another effort at an IPO of BATS as early as 2016, or the coming months, under new president and chief executive Chris Concannon.
- 28.
See Edward MANDELBAUM and Cooperative Trading Services, Incorporated, Plaintiffs,
v.NEW YORK MERCANTILE EXCHANGE, R. Patrick Thompson, Ronald G. Oppenheimer, James Morrissey, Stuart Smith, and Does 1 Through 10 Inclusive, Defendants.
No. 93 Civ. 8302 (AGS). August 1, 1995. United States District Court, S.D. New York.
- 29.
As background, the Securities and Exchange Commission published a policy statement on the automated systems of SROs Automated Systems of Self-Regulatory Organizations (II). Stating in part: “On November 16, 1989, the Securities and Exchange Commission (“SEC” or “Commission”) published its first Automation Review Policy (“ARP I”)1 in which it stated its view that the self-regulatory organizations (“SROs”), on a voluntary basis, should establish comprehensive planning and assessment programs to determine systems capacity and vulnerability”. At that time, the Commission noted the impact that systems problems and failures could have on public investors, broker-dealer risk exposure, and market efficiency and, as a result, urged that the SROs take appropriate measures to ensure that, initially, their automated trading systems “have the capacity to accommodate current and reasonably anticipated future trading volume levels adequately and to respond to localized emergency conditions” (ARP I at 12). See http://www.sec.gov/divisions/marketreg/arp-ii.htm
- 30.
Arthur Levitt served as SEC Chairman from 1993 to 2001.
- 31.
Before institutions started investing more heavily in private companies, the well-known funding option for private companies was capital raising via venture capital (VC) investors. By one estimate, even if institutions earmarked 1% of their assets under management to pre-IPO investments, this would equal up to $40 billion (as of Q3 2013), which is much more than the available VC funding.
- 32.
The amount of capital that institutions are investing in private companies is a very small portion of their assets under management. However, these investments are providing capital to private companies that would otherwise have to go public in order to raise funds to operate. By tapping these institutions, the companies can delay going public while still raising the capital they need.
- 33.
As of its signing into law on April 2012, the JOBS Act raised the number of shareholders a company is allowed to have before it is required to register with the Securities and Exchange Commission to 2000 total shareholders, or 500 shareholders who are not accredited investors. Certain types of shareholders are excluded from these totals.
- 34.
Long only is a feature or policy of many mutual funds, and it refers to a policy of only holding “long” positions in assets and securities.
- 35.
Founded in 2004, New York City-based SecondMarket (formerly Restricted Stock Partners) offers an electronic facility and a service for private companies and investment funds seeking to do tender offers or share buybacks. The company also has a trading unit for illiquid assets, including private company stock. See company website: http://www.secondmarket.com
- 36.
Some observers say the real reason Facebook went public is because it exceeded or bumped up against the 500-shareholder limit which would have required it to register with the Securities and Exchange Commission. The JOBS Act, as previously noted, raised the number of shareholders a company is allowed to have prior to being mandated to register to 2000 total, or 500 shareholders who are not accredited investors. “In other words,” as Cheryl Knopp explained in a follow-up note, “Facebook didn’t have enough control over its private shareholders in order to prevent them from simply transferring the shares. There were a lot of share transfers without the company being involved – and so it seemed like Facebook’s shareholders became a lot of high-net worth individuals who were in it for the bump at IPO. They presumably would not be required to sign the underwriter lock up so they would be able to sell at the IPO.”
Knopp added: “Contrast this with a large investment from an institution that wants to build a position. They buy a large amount pre-IPO and then likely will buy more at the IPO and hold the shares for a while. This is also arguably a more desirable shareholder base than lots of smaller individual shareholders.”
- 37.
Referring to the American Stock Exchange where Wolkoff was Chairman and CEO from January 2005 to October 2008.
- 38.
See this section from: Jumpstart Our Business Startups Act: Frequently Asked Questions About Crowdfunding Intermediaries, Division of Trading and Markets, May 7, 2012:Crowdfunding issuers. Title III of the JOBS Act amends Section 4 of the Securities Act to create a new exemption for offerings of “crowdfunded” securities. Specifically, the JOBS Act amends Section 4 of the Securities Act to exempt issuers from the requirements of Section 5 of that Act when they offer and sell up to $1 million in securities, provided that individual investments do not exceed certain thresholds and the issuer satisfies other conditions in the JOBS Act, some of which will require rulemaking by the SEC.” http://www.sec.gov/divisions/marketreg/tmjobsact-crowdfundingintermediariesfaq.htm
- 39.
As Wolfhoff explained in a follow-up: “Most companies don’t go public for a million dollars, For some companies, yes, one million dollars of funding will work. But for others looking to go public, it is a drop in the bucket, not a replacement for going public.”
- 40.
In a Fact Sheet, published July 10, 2013, the Securities and Exchange Commission explained: “While issuers will be able to widely solicit and advertise for potential investors, the JOBS Act required the SEC to adopt rules that require the issuer to take reasonable steps to verify that purchasers of the securities are accredited investors, using such methods as determined by the Commission.” In other words, there is no restriction on who an issuer can solicit, but an issuer faces restrictions on who is permitted to purchase its securities.” See http://www.sec.gov/news/press/2013/2013-124-item1.htm July 10, 2013.
- 41.
Section 404(b) of the Sarbanes-Oxley Act requires a publicly held company’s auditor to attest to, and report on, management’s assessment of its internal controls.
For more, see The JOBS ACT: A New IPO Playing Field for Emerging Growth Companies. Goodwin Procter April 25, 2012. http://www.goodwinprocter.com/Publications/Newsletters/Client-Alert/2012/0425_JOBS-ACT-A-New-IPO-Playing-Field-For-Emerging-Growth-Companies
- 42.
“Simply put, an accredited investor is someone who the SEC deems capable of taking on the economic risk of investing in unregistered securities. Entities may also be deemed accredited investors, including banks, partnerships, corporations, nonprofits and trusts.” Source: Eric Rosenbaumm, CNBC website, February 4, 2015.
- 43.
Referring to a proposed pilot program for trading small-cap stocks in wider minimum increments. The pilot eventually was approved by the Securities and Exchange Commission. See SEC Approves Pilot Program to Assess Tick Size Impact for Smaller Companies. Center for Financial Stability, May 7, 2015. http://centerforfinancialstability.org/wp/?p=5987
- 44.
Chris Concannon, tongue in cheek, is presumably referring here to the New York Stock Exchange on stock liquidity, and his reference to NYSE specialists points to their role on the floor prior to regulatory and technological changes that disintermediated human trader intervention. These human “specialists” were succeeded by (still human) Designated Market Makers, or DMMs, on the Big Board floor.
- 45.
In a 2014 study, New York agency brokerage Rosenblatt Securities concluded that the introduction of a “trade-at” rule could halve trading volumes in US dark pools. The “trade at” would shift equity transactions onto lit exchanges unless dark pools or internalizing matching engines run by brokers could show notable price improvement had been accomplished.
- 46.
The AX Trading Group based in Stamford, Conn, is operator of the AX Trading Network. The company in early 2013 said it would shutter AX Trading, its dark pool share-trading platform, citing a slow pickup rate.
- 47.
In a letter back in July 2009, Sen. Charles Schumer (D-NY) urged the SEC to ban flash order types. See Schumer Calls for Crackdown on ‘Flash’ Trading. http://www.forbes.com/2009/07/24/flash-trading-schumer-business-wall-street-flash.html
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Mehta, N., Bookbinder, S., Concannon, C., Knopp, C., O’Brien, W., Wolkoff, N. (2017). The Need for Further Change. In: Schwartz, R., Byrne, J., Stempel, E. (eds) Rapidly Changing Securities Markets. Zicklin School of Business Financial Markets Series. Springer, Cham. https://doi.org/10.1007/978-3-319-54588-2_7
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