Committee on Capital Markets Regulation Seeks To Address Market Rigging

The recommendations are aimed at fixing trading problems in response to charges of a "rigged" market.

A blue-ribbon panel consisting of Wall Street executives, hedge fund titan Ken Griffin at Citadel, Kenneth Bentsen Jr., head of the Securities Industry and Financial Markets Association, and representatives of trading firms and investment banks, is proposing a set of reforms aimed at restoring confidence in the stock market, according to an article published by CNBC today.

The Committee on Capital Markets Regulation has released a list of changes it believes will make the market function better, in response to charges of a “rigged” market fuelled by a series of well-publicised malfunctions.

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Flash Boys

Michael Lewis made the “rigged” accusation following the 2014 publication of his book, Flash Boys, which detailed the crusade of upstart exchange IEX to counter high-frequency trading strategies.

HFTs use computers to trade in milliseconds and have frequently been blamed for market problems. The book details the measures HFTs take to gain advantages over competitors.

While the committee said it does not believe Lewis’ claim to be accurate, it has acknowledged that the market requires some basic structural reforms.

Hal Scott, a Harvard professor who chaired the committee, stated: “Although our markets are not rigged, there is clearly room for improvement. Our blueprint provides the SEC with the direction that it needs to unleash the benefits of a resilient, transparent and competitive stock market.”

Recommendations

The recommendations were designed to address three main areas. These include increasing transparency to provide investors with a clearer idea of what’s happening in the market with regard to pricing, strengthening resiliency to minimise the damage from episodes such as the March 2010 flash crash, and reducing transactions costs.

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Among the proposals are increased disclosure on trading activities, quicker triggering of circuit breakers that halt trading during unusual activity, and a top-to-bottom review of fees and pricing.

A further recommendation is that exchanges reduce the fees they charge brokers which would save investors $850 million a year.

Although Scott is reported to have said the changes were inspired by “Flash Boys”, and he mentioned that some of the concerns about the market are misplaced.

He said that strategies employed by high-frequency traders, like attempting to capitalise on discrepancies in price spreads for individual stocks, “are just modern versions of traditional market making and arbitrage strategies that have always existed and provide important benefits to investors.”

According to the report, “dark pools,” or trading venues operated away from public exchanges, actually help save investors money through better pricing”.

“Even during times of crisis there is limited empirical evidence that HFT strategies contribute to price declines, with the majority of studies finding that HFT strategies help stabilize prices during a market crash.”

Many of the proposed changes could be implemented by the Securities and Exchange Commission (SEC) but some will require legislative action.

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