Exchanges

11:02 AM
Joe Saluzzi
Joe Saluzzi
Commentary
Connect Directly
Twitter
RSS
E-Mail
50%
50%

Open Letter to Mary Jo White

Themis Trading's letter to Mary Jo White asks the SEC Chairman nominee to consider regulating dark pools, changing the SRO rule-making process and banning payment for order flow at all levels.

Editor's Note: The following is an excerpt from a letter from Themis Trading to the nominee for SEC Chairman. Themis Trading, an independent institutional agency brokerage firm specializing in equities, is critical of the current equity market structure.

Dear Mary Jo,

Congratulations on your nomination for SEC Chairman.  As you may know, we at Themis Trading are, and have been, very critical of the current US equity market structure.  We believe that a series of rule changes begun under the stewardship of one of your predecessors, Arthur Levitt, are largely responsible for turning deep, centralized, and diverse pools of liquidity into our current fragmented mess of a market, which includes thirteen stock exchanges and dozens of dark pools. These fragmented trading venues are shallow and non-diverse in their participation, have non-uniform matching rules, and in many cases are extremely non-transparent. And in times of market stress, this current fragmented system has an Achilles heel, which has been exposed in the May 6th Flash Crash, as well as in the countless mini-flash-crashes, botched IPOs, and algo-glitches.

NBC News: Obama Picks White for SEC

Visit NBCNews.com for breaking news, world news, and news about the economy

Ironically, the SEC has been very aware of so many conflicts of interests and flaws in our modern market structure. It recognized many of these flaws back in the actual Reg NMS 2007 document, but chose to implement Reg NMS anyway. In 2009 it proposed banning "flash-style" orders, although it has never followed through. In that same year it proposed regulating dark pools, recognizing that publicly displayed market quotes are important for the price discovery process, although again it had never followed through.

Since May 6th 2010, the SEC has proposed some marginal patches for the exposed market structure flaws, including the removal of stub quotes and the addition of single stock circuit breakers, which are soon to be replaced by a limit up limit down safety mechanism. These actions, however, amount to little more than band aids on an infected wound. These actions do not address root plumbing issues and instabilities in our structure. They did not prevent the Knight algo disaster last August, and they will most likely not prevent the next flash crash.  While our regulatory bodies are quite adept at holding roundtables, and "looking into" troublesome issues, they need to follow through in order to command respect from the investing public.

While markets are currently near historic highs, there exists a temptation to ignore problems as complex as market structure. However, we think it is precisely at this point in time that we need to fix our capital-raising system’s plumbing. We think that you have a great opportunity as the new Chairman to take a holistic approach to market reform. We hope you will seriously consider:

--Banning payment for order flow at all levels. --Eliminating  the maker-taker exchange pricing model. --Mandating that exchanges route to each other when fragmented markets become "locked". --Simplifying/eliminating complex and unnecessary exchange and dark pool order types. --Instituting dark pool regulation. --Changing the SRO rule-making process so as to include input from investors, and not just traders.

The time has come to recognize that the Frankenstein market that has been created, perhaps unintentionally, does not possess a sound foundation. While technology has been a crucial and cherished driver of good for investors, the SEC must make sure technology is leveraged in alignment with the goals of investors, and not traders -- no matter how fast they are.

[To read Themis Trading's entire letter, visit Themis Trading's Blog: An Open Letter to Mary Jo White.]

Joseph Saluzzi is partner, co-founder and co-head of equity trading of Themis Trading LLC, a leading independent agency brokerage firm that trades equities for institutional money managers and hedge funds. He is also the co-author of Broken Markets -- How High Frequency ... View Full Bio
Comment  | 
Print  | 
More Insights
Comments
Newest First  |  Oldest First  |  Threaded View
Greg MacSweeney
50%
50%
Greg MacSweeney,
User Rank: Apprentice
1/28/2013 | 4:14:03 PM
re: Open Letter to Mary Jo White
Many of the changes that should be made will require a revamp of many of the existing rules that the SEC itself has set up. That's a lot to ask of a regulator (basically admitting they messed up). Will the SEC go as far as it needs to go? Or will it continue to apply band aids or look the other way?
More Commentary
The New Race to Zero
The low-latency trading race is almost over, but the in-memory analytics race is just beginning.
The Bankerless Bank
Regulatory upheaval has distracted banks from developing innovative technology. When will banks return their focus to building technology for competitive advantage?
4 Factors Driving Enlightenment & Big-Data Adoption in Regulatory Compliance
Whether seeking to maintain compliance or to drive business value, emerging technologies can unleash tremendous potential.
The Art of Leveraging Governance, Risk & Compliance Technology Tools
Eliminating compliance risk across information channels is a constantly transforming task. Ongoing auditing and auto-corrective technology can increase trust, accountability, and transparency.
The FSB's Swaps Data Aggregation Report, a Technical Review
The Report discusses legal, technological, and regulatory issues to be resolved in order to obtain a complete view of swap transactions around the world.
Register for Wall Street & Technology Newsletters
White Papers
Current Issue
Wall Street & Technology - Elite 8, October 2014
The in-depth profiles of this year's Elite 8 honorees focus on leadership, talent recruitment, big data, analytics, mobile, and more.
Video
Exclusive: Inside the GETCO Execution Services Trading Floor
Exclusive: Inside the GETCO Execution Services Trading Floor
Advanced Trading takes you on an exclusive tour of the New York trading floor of GETCO Execution Services, the solutions arm of GETCO.