By Jacquelyn Lumb
In remarks before the Securities Traders Association’s annual market structure conference, Commissioner Kara Stein focused on the need for transparency in today’s markets. Transparency is not just about disclosure, she said, but also about verification. The market is built on trust, confidence, and integrity, she explained, and she called for dramatic reforms to bring more transparency to alternative trading systems, or dark pools.
Call for more transparency. Stein acknowledged that transparency cannot solve all problems, but in her view, it goes a long way toward leveling the playing field and empowering investors. Dark pools have been around for decades, she added, but their presence in the market is growing ever larger and it is not clear that they continue to perform as originally intended. While originally intended to allow trading of large blocks of securities by institutional investors in a way that would help them obtain the best price, Stein said that studies have shown that the average execution size of dark pools in the U.S. has decreased to fewer than 200 shares.
As more trading is routed to dark venues, Stein said that market price discovery may be distorted and conflicts of interest may not be readily apparent. In addition, recent enforcement actions have revealed serious problems in how a number of ATSs operate. She questioned whether these cases are isolated incidences or symptoms of systemic problems. Without improved transparency, there is no way for investors to know, she said.
Stein called on the SEC to adopt reforms to bring more transparency to dark venues. All market participants should be able to understand how they operate, she said, and ATSs should compete on a level playing field where market participants can choose the best trading venue for their purposes. For a start, she said more execution and order data should be publicly available. In Stein’s view, the modernization of the SEC’s disclosure rules for order execution and routing should be priorities and could be implemented fairly quickly.
Consolidated audit trail. Stein also reviewed plans for a consolidated audit trail that will allow the SEC to track every order and trade in the markets. Although the SEC adopted a final rule to mandate the construction of CAT, as it is known, the process has not yet begun, she said. The SEC has largely outsourced the responsibility for CAT, she noted, which has not worked. Stein has advocated for a CAT project manager and for more resources, but has seen little progress.
Stein said that repeated, and not entirely understood, market disruptions undermine market integrity and damage investor confidence. The implementation of CAT and an upgraded MIDAS analytical tool will help modernize the SEC’s oversight of the securities markets, to the benefit of the agency, the markets, and investors, she said.
Stein also suggested that in a world where programming errors are just as damaging to investors as improper sales practices, the regulatory approach has to evolve. Organizational charts should not shield individuals from accountability, she said. So-called technical glitches are typically followed by a series of finger pointing, she explained. Stein raised the idea of licensing certain technical personnel to increase accountability.
Stein said it is time to refocus on the fair and efficient allocation of capital and that transparency would go a long way to restoring confidence in the integrity of the marketplace.