House Financial Services Subcommittee Examines Market Structure Issues
AT YESTERDAY’S HOUSE FINANCIAL SERVICES SUBCOMMITTEE HEARING, lawmakers evaluated recent SEC proposals to change the current market structure and the impact those changes would have on competition, product innovation, market quality, and small issuers and investors. The subcommittee heard testimony from two panels of witnesses who gave their recommendations, including support for issuers to choose their own tick size.
Subcommittee Chairman Scott Garrett (R-N.J.) opened by saying that enhanced competition and innovation must be brought about by improving efficiency, and empirical data should be studied rather than giving too much credence to recent events in the markets.
First Panel
The first panel included Daniel Coleman, CEO of GETCO; Kevin Cronin, Global Head of Equity Trading of INVESCO, testifying on behalf of the Investment Company Institute; Joe Gawronski, President and COO of Rosenblatt Securities; Thomas Joyce, Chairman and CEO of Knight Capital Group; Duncan Niederauer, CEO of NYSE Euronext; and Cameron Smith, President of Quantlab Financial LLC.
Coleman testified that investor confidence has been declining over the past decade and said policy makers should take steps to foster market stability and restore confidence.
Cronin also noted the decline in investor confidence. He raised a number of other issues regulators and market participants should address, including enhanced surveillance methods, the need for increased transparency, difficulties surrounding capital formation and minimum quote variations, and issues with undisplayed liquidity. Cronin suggested instituting pilot programs to generate data in these areas.
In his testimony, Gawronski supported the provision in the Jumpstart Our Business Startups (JOBS) Act requiring the SEC to study whether wider minimum price increments would improve market quality for emerging-growth companies. He stated that the current market structure is the product of a gradual evolution and any fundamental reforms should be considered “only with the greatest of care.”
Joyce also voiced his support for the tick size study proposed in the JOBS Act, saying a competitive choice-driven market is best.
Niederauer testified that consolidated, transparent prices form the core of our market system and said investors are more likely to have confidence in the securities markets if they believe they are receiving fair prices. He added that public price discovery should be promoted, dark pools should be restored to their original purpose, and the competitive playing field should be leveled.
In his testimony, Smith asked that any policies be shaped based on empirical data and rigorous analysis. His proposed areas for improvement included the issue of fragmenting the market between too many trading venues, and suggested policy makers should ensure current regulations don’t inadvertently contribute to fragmentation by hindering the ability of public markets to compete with private markets.
Q&A
In the question and answer session with the first panel, Chairman Garrett asked for comments on the existing rule process and areas for improvement. Niederauer expressed frustration with an unleveled playing field and how that hinders competition. Joyce responded that a broker dealer and an exchange are two different things which must be considered when speaking about a level playing field, and said a broker dealer has a fiduciary responsibility while an exchange does not.
Rep. Carolyn Maloney (D-N.Y.) asked what percentage of the market is comprised of dark pools, why they are growing, and what their impact is on the competitiveness of the market. Niederauer explained that about 14-15 percent of the market is comprised of dark pools and said he thinks they are growing because institutional investors “seek refuge” in them for block trades.
Rep. Robert Hurt (R-Va.) asked the panel when they expect to be able to judge the effectiveness of the JOBS Act. Niederauer said he is optimistic they will see results from the JOBS Act as early as next year. Rep. Hurt also asked about the effect of trading regulation on small and mid-cap companies, and how it can be made easier for those firms to access capital. Joyce said those companies by nature behave differently. He said rules have restricted research but changes such as the JOBS Act may help, as well as wider spreads.
Rep. David Schweikert (R-Ariz.) asked what the benefits or consequences might be for allowing a smaller-cap company to choose their own tick size. Coleman said he would prefer to let the exchange decide the tick size. Cronin agreed, saying the exchange is probably better equipped to determine tick size, rather than the issuing company. Joyce promoted choice, saying if the companies think it would be beneficial for them, they should choose their own tick size. Niederauer agreed, saying the choice can enhance liquidity, but said too many tick sizes may confuse the marketplace. Smith said tick sizes should be calibrated, and having issuers select them on behalf of someone who owns the stock does not make a lot of sense.
Rep. Schweikert followed up, asking if flexibility of tick sizes could help provide liquidity for the next generation of small companies and entrepreneurs. Smith voiced support for a pilot program experimenting with tick sizes. Niederauer agreed and said the JOBS Act was one way of trying to “open the door for the next wave of entrepreneur.”
Rep. Patrick McHenry (R-N.C.) mentioned legislation he drafted which would encourage smaller companies to use the markets for capital and gain liquidity support. He asked what the witnesses would expect to be included in a liquidity support agreement if his legislation were to pass. Joyce responded that a wider spread of tick sizes may encourage participation. He said issuers should be allowed to pay for market making support and allow research to “articulate the story.”
Second Panel
The second panel included Dan Mathisson, Managing Director at Credit Suisse Securities; William O’Brien, CEO of Direct Edge; Jeffrey Solomon, CEO of Cowen and Company; Jim Toes, President and CEO of the Security Traders Association; and David Weild, Senior Advisor of the Capital Markets Group at Grant Thorton and Chairman and CEO of Capital Markets Advisory Partners.
Mathisson said in his testimony that exchanges today are not too different from broker dealers and should not be able to be “for-profit and not-for profit at the same time.” Mathisson said restoring the exchanges’ moral hazard would be a step in the right direction for the markets as well as removing their self-regulatory organization (SRO) status.
O’Brien testified that investor and issuer confidence is at a low point, and more efficient competition would help restore confidence. He said the exchanges should have greater flexibility and a more efficient way to communicate with each other, but that he does not like the term “unleveled playing field.” O’Brien said automation and technology should not be impeded.
In his testimony, Solomon said wider spreads could help increase liquidity in small-cap stocks and said decimalization is not a one-size-fits-all proposition. He suggested Congress and regulators consider increasing the tick size for emerging growth companies, or allow them to choose their own tick size.
Toes focused his testimony on investor confidence, capital formation and the quality of regulation. He suggested the SEC consider alternative approaches to the approval of SRO rule proposals that have market-wide implications on the structure of the market.
Weild recommended that small issuers be allowed to choose their own tick size. He said the “one-size-fits-all” stock market has the U.S. averaging much fewer IPOs annually than it could be realizing.
Q&A
Rep. Schweikert asked if tick size really makes a big difference, and if a company should be able to choose for itself or get help from an exchange. Weild reiterated that a “one-size-fits-all” approach does not help create liquidity. Rep. Schweikert noted that academic literature shows small tick size has increased liquidity in large-cap stocks, but are actually harmful to the liquidity of micro-cap stocks.
More information can be found here.
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AT YESTERDAY’S HOUSE FINANCIAL SERVICES SUBCOMMITTEE HEARING, lawmakers evaluated recent SEC proposals to change the current market structure and the impact those changes would have on competition, product innovation, market quality, and small issuers and investors. The subcommittee heard testimony from two panels of witnesses who gave their recommendations, including support for issuers to choose their own tick size.
Subcommittee Chairman Scott Garrett (R-N.J.) opened by saying that enhanced competition and innovation must be brought about by improving efficiency, and empirical data should be studied rather than giving too much credence to recent events in the markets.
First Panel
The first panel included Daniel Coleman, CEO of GETCO; Kevin Cronin, Global Head of Equity Trading of INVESCO, testifying on behalf of the Investment Company Institute; Joe Gawronski, President and COO of Rosenblatt Securities; Thomas Joyce, Chairman and CEO of Knight Capital Group; Duncan Niederauer, CEO of NYSE Euronext; and Cameron Smith, President of Quantlab Financial LLC.
Coleman testified that investor confidence has been declining over the past decade and said policy makers should take steps to foster market stability and restore confidence.
Cronin also noted the decline in investor confidence. He raised a number of other issues regulators and market participants should address, including enhanced surveillance methods, the need for increased transparency, difficulties surrounding capital formation and minimum quote variations, and issues with undisplayed liquidity. Cronin suggested instituting pilot programs to generate data in these areas.
In his testimony, Gawronski supported the provision in the Jumpstart Our Business Startups (JOBS) Act requiring the SEC to study whether wider minimum price increments would improve market quality for emerging-growth companies. He stated that the current market structure is the product of a gradual evolution and any fundamental reforms should be considered “only with the greatest of care.”
Joyce also voiced his support for the tick size study proposed in the JOBS Act, saying a competitive choice-driven market is best.
Niederauer testified that consolidated, transparent prices form the core of our market system and said investors are more likely to have confidence in the securities markets if they believe they are receiving fair prices. He added that public price discovery should be promoted, dark pools should be restored to their original purpose, and the competitive playing field should be leveled.
In his testimony, Smith asked that any policies be shaped based on empirical data and rigorous analysis. His proposed areas for improvement included the issue of fragmenting the market between too many trading venues, and suggested policy makers should ensure current regulations don’t inadvertently contribute to fragmentation by hindering the ability of public markets to compete with private markets.
Q&A
In the question and answer session with the first panel, Chairman Garrett asked for comments on the existing rule process and areas for improvement. Niederauer expressed frustration with an unleveled playing field and how that hinders competition. Joyce responded that a broker dealer and an exchange are two different things which must be considered when speaking about a level playing field, and said a broker dealer has a fiduciary responsibility while an exchange does not.
Rep. Carolyn Maloney (D-N.Y.) asked what percentage of the market is comprised of dark pools, why they are growing, and what their impact is on the competitiveness of the market. Niederauer explained that about 14-15 percent of the market is comprised of dark pools and said he thinks they are growing because institutional investors “seek refuge” in them for block trades.
Rep. Robert Hurt (R-Va.) asked the panel when they expect to be able to judge the effectiveness of the JOBS Act. Niederauer said he is optimistic they will see results from the JOBS Act as early as next year. Rep. Hurt also asked about the effect of trading regulation on small and mid-cap companies, and how it can be made easier for those firms to access capital. Joyce said those companies by nature behave differently. He said rules have restricted research but changes such as the JOBS Act may help, as well as wider spreads.
Rep. David Schweikert (R-Ariz.) asked what the benefits or consequences might be for allowing a smaller-cap company to choose their own tick size. Coleman said he would prefer to let the exchange decide the tick size. Cronin agreed, saying the exchange is probably better equipped to determine tick size, rather than the issuing company. Joyce promoted choice, saying if the companies think it would be beneficial for them, they should choose their own tick size. Niederauer agreed, saying the choice can enhance liquidity, but said too many tick sizes may confuse the marketplace. Smith said tick sizes should be calibrated, and having issuers select them on behalf of someone who owns the stock does not make a lot of sense.
Rep. Schweikert followed up, asking if flexibility of tick sizes could help provide liquidity for the next generation of small companies and entrepreneurs. Smith voiced support for a pilot program experimenting with tick sizes. Niederauer agreed and said the JOBS Act was one way of trying to “open the door for the next wave of entrepreneur.”
Rep. Patrick McHenry (R-N.C.) mentioned legislation he drafted which would encourage smaller companies to use the markets for capital and gain liquidity support. He asked what the witnesses would expect to be included in a liquidity support agreement if his legislation were to pass. Joyce responded that a wider spread of tick sizes may encourage participation. He said issuers should be allowed to pay for market making support and allow research to “articulate the story.”
Second Panel
The second panel included Dan Mathisson, Managing Director at Credit Suisse Securities; William O’Brien, CEO of Direct Edge; Jeffrey Solomon, CEO of Cowen and Company; Jim Toes, President and CEO of the Security Traders Association; and David Weild, Senior Advisor of the Capital Markets Group at Grant Thorton and Chairman and CEO of Capital Markets Advisory Partners.
Mathisson said in his testimony that exchanges today are not too different from broker dealers and should not be able to be “for-profit and not-for profit at the same time.” Mathisson said restoring the exchanges’ moral hazard would be a step in the right direction for the markets as well as removing their self-regulatory organization (SRO) status.
O’Brien testified that investor and issuer confidence is at a low point, and more efficient competition would help restore confidence. He said the exchanges should have greater flexibility and a more efficient way to communicate with each other, but that he does not like the term “unleveled playing field.” O’Brien said automation and technology should not be impeded.
In his testimony, Solomon said wider spreads could help increase liquidity in small-cap stocks and said decimalization is not a one-size-fits-all proposition. He suggested Congress and regulators consider increasing the tick size for emerging growth companies, or allow them to choose their own tick size.
Toes focused his testimony on investor confidence, capital formation and the quality of regulation. He suggested the SEC consider alternative approaches to the approval of SRO rule proposals that have market-wide implications on the structure of the market.
Weild recommended that small issuers be allowed to choose their own tick size. He said the “one-size-fits-all” stock market has the U.S. averaging much fewer IPOs annually than it could be realizing.
Q&A
Rep. Schweikert asked if tick size really makes a big difference, and if a company should be able to choose for itself or get help from an exchange. Weild reiterated that a “one-size-fits-all” approach does not help create liquidity. Rep. Schweikert noted that academic literature shows small tick size has increased liquidity in large-cap stocks, but are actually harmful to the liquidity of micro-cap stocks.
More information can be found here.