By Jacquelyn Lumb
In remarks at the Practising Law Institute’s SEC Speaks conference, Commissioner Kara Stein spoke about changes in the markets, how they affect investors, and how the Commission should respond. One significant change is the dominance of institutional investors in the equities market, which now own 70 percent of public shares. Stein reported that three money managers hold the largest ownership position in 88 percent of the companies in the S&P 500, which means they manage significant interest in companies that directly compete with each other.
New products. One area of significant growth has been exchange-traded products or exchange-traded funds, which are still governed by what Stein characterized as a patchwork of rules and exemptions that were developed a decade ago. As products and advisers have changed, so too has trading. Stein noted that the move to electronic trading has increased the interconnection between securities, products, and marketplaces.
Less transparent markets. The markets have also become less transparent, according to Stein, with trading increasingly done off-exchange in dark pools. She reported that in 2015, about one-third of equity trading occurred off-exchange. The move to dark markets affects both price discovery and transparency in the public markets, Stein added.
Capital raising is also moving to less transparent venues. Stein said that more money is raised today in unregistered private offerings than in registered offerings. Initial public offerings are less frequent and there are fewer public reporting companies than in the past. Most of these securities that are offered in the dark are held by millions of Americans through institutional investors, she noted.
Stein said that among the important questions to ask is whether the markets are allocating money to those who will put it to its best use, whether smaller companies can access the capital they need to grow and create jobs, and whether ownership concentration affects companies’ willingness to compete and invest in innovation. She also pondered whether market changes are affecting investors’ willingness to provide the capital that companies need, and whether the increasing opacity of the markets has an impact on the effectiveness and efficiency of the capital raising process. In addition, she also raised questions about market security in the face of cyber attacks or even technical glitches.
Responses underway. While there is much work to do, Stein said some measures are already underway, including pilot programs to address mini-flash crashes and flash rallies. The self-regulatory organizations have also begun work on a consolidated audit trail that will provide more market data to the SEC.
Stein said that technology should be used to improve disclosure, which in turn would facilitate more efficient capital allocation. She also called for careful monitoring of the impact that market changes are having on investors. Investors must have adequate information about complex retail products, and the SEC’s rules must protect investors harmed by illegal activity. For example, Stein said that the amount of money victims lose is often more than wrongdoers gain through their illegal actions. The SEC is unable to make victims whole because it can only obtain disgorgement, but not restitution. She asked whether that should change.
The financial markets are vital to the economy, Stein said, and the SEC must steer the markets to meet the demands of a new and ever-changing world, she concluded.