Tired Of Being Scalped By HiFTers? Tell The SEC All About It
The SEC has opened up the public comment section for File No. S7-02-10 "Concept Release on Equity Market Structure" also known as the "Help us because the SEC is hopelessly lost when evaluating the impact of high frequency trading" proposal. As the SEC points out: "This release is intended to facilitate public comment by first giving a basic overview of the legal and factual elements of the current equity market structure and then presenting a wide range of issues for comment. The Commission cautions that it has not reached any final conclusions on the issues presented for comment. The discussion and questions in this release should not be interpreted as slanted in any particular way on any particular issue. The Commission intends to consider carefully all comments and to complete its review in a timely fashion. At that point, it will determine whether there are any problems that require a regulatory initiative and, if so, the nature of that initiative." Most relevantly for Zero Hedge readers, the SEC's response solicitation form is now open and can be found here.
So presumably as the SEC attempts to avoid days like today when the entire market is trading in lockstep with Citi shares, which now account for an ungodly percentage of overall market volume, here is what a presumed efficient market should look like to the SEC:
- economically efficient execution of securities transactions;
- fair competition among brokers and dealers, among exchange markets, and between exchange markets and markets other than exchange markets;
- the availability to brokers, dealers, and investors of information with respect to quotations and transactions in securities;
- the practicability of brokers executing investors’ orders in the best market; and
- an opportunity, consistent with efficiency and best execution, for investors’ orders to be executed without the participation of a dealer.
Yet even the SEC admits it is hopelessly confused when tasked with such a massive undertaking:
The Commission’s task has been to facilitate an appropriately balanced market structure that promotes competition among markets, while minimizing the potentially adverse effects of fragmentation on efficiency, price transparency, best execution of investor orders, and order interaction. An appropriately balanced market structure also must provide for strong investor protection and enable businesses to raise the capital they need to grow and to benefit the overall economy. Given the complexity of this task, there clearly is room for reasonable disagreement as to whether the market structure at any particular time is, in fact, achieving an appropriate balance of these multiple objectives. Accordingly, the Commission believes it is important to monitor these issues and, periodically, give the public, including the full range of investors and other market participants, an opportunity to submit their views on the matter. This concept release is intended to provide such an opportunity.
While the SEC is and has always been an utter joke of an organization, let along a regulator, they do provide some pretty charts for everyone's perusal.
Some more tidbits: an overview of Dark Pool's from the SEC's point of view:
Dark pools are ATSs that, in contrast to ECNs, do not provide their best-priced orders for inclusion in the consolidated quotation data. In general, dark pools offer trading services to institutional investors and others that seek to execute large trading interest in a manner that will minimize the movement of prices against the trading interest and thereby reduce trading costs.28 There are approximately 32 dark pools that actively trade NMS stocks, and they executed approximately 7.9% of share volume in NMS stocks in the third quarter of 2009.29 ATSs, both dark pools and ECNs, fall within the statutory definition of an exchange, but are exempted if they comply with Regulation ATS. Regulation ATS requires ATSs to be registered as broker-dealers with the Commission, which entails becoming a member of the Financial Industry Regulatory Authority (“FINRA”) and fully complying with the broker-dealer regulatory regime. Unlike a registered exchange, an ATS is not required to file proposed rule changes with the Commission or otherwise publicly disclose its trading services and fees. ATSs also do not have any self-regulatory responsibilities, such as market surveillance. The regulatory differences between registered exchanges and ATSs are addressed further in section IV.C.3. below.
Dark pools can vary quite widely in the services they offer their customers. For example, some dark pools, such as block crossing networks, offer specialized size discovery mechanisms that attempt to bring large buyers and sellers in the same NMS stock together anonymously and to facilitate a trade between them. The average trade size of these block crossing networks can be as high as 50,000 shares.30 Most dark pools, though they may handle large orders, primarily execute trades with small sizes that are more comparable to the average size of trades in the public markets, which was less than 300 shares in July 2009.31 These dark pools that primarily match smaller orders (though the matched orders may be “child” orders of much larger “parent” orders) execute more than 90% of dark pool trading volume.32 The majority of this volume is executed by dark pools that are sponsored by multi-service broker-dealers. These broker-dealers also offer order routing services, trade as principal in the sponsored ATS, or both.
On the question of Market Linkages, or the ability to (front)trade on venue X when a market maker sees information coming out of venue Y.
Given the dispersal of liquidity across a large number of trading centers of different types, an important question is whether trading centers are sufficiently linked together in a unified national market system. Thus far in this release, the term “dispersed” has been used to describe the current market structure rather than “fragmented.” The term “fragmentation” connotes a negative judgment that the linkages among competing trading centers are insufficient to achieve the Exchange Act objectives of efficiency, price transparency, best execution, and order interaction. Whether fragmentation is in fact a problem in the current market structure is a critically important issue on which comment is requested in section IV below in a variety of contexts.
On Broker Routing Services, or how Goldman's REDI will always get you the best "liquidity" for a small consideration:
In a dispersed and complex market structure with many different trading centers offering a wide spectrum of services, brokers play a significant role in linking trading centers together into a unified national market system. Brokers compete to offer the sophisticated technology tools that are needed to monitor liquidity at many different venues and to implement order routing strategies. To perform this function, brokers may monitor the execution of orders at both displayed and undisplayed trading centers to assess the availability of undisplayed trading interest. Brokers may, for example, construct real-time “heat maps” in an effort to discern and access both displayed and undisplayed liquidity at trading centers throughout the national market system.
Using their knowledge of available liquidity, many brokers offer smart order routing technology to access such liquidity. Many brokers also offer sophisticated algorithms that will take the large orders of institutional investors and others, divide a large “parent” order into many smaller “child” orders, and route the child orders over time to different trading centers in accordance with the particular trading strategy chosen by the customer. Such algorithms may be “aggressive,” for example, and seek to take liquidity quickly at many different trading centers, or they may be “passive,” and submit resting orders at one or more trading centers and await executions at favorable prices.
The SEC provides a critical observation on speculation versus actual investing:
Given the difference in time horizons, however, the trading needs of long-term investors and short-term professional traders often may diverge. Professional trading is a highly competitive endeavor in which success or failure may depend on employing the fastest systems and the most sophisticated trading strategies that require major expenditures to develop and operate. Such systems and strategies may not be particularly useful, in contrast, for investors seeking to establish a long-term position rather than profit from fleeting price movements. Where the interests of long-term investors and short-term professional traders diverge, the Commission repeatedly has emphasized that its duty is to uphold the interests of long-term investors.[HAHAHAHAHAHAHA]
Comment is requested on the practicality of distinguishing the interests of long-term investors from those of short-term professional traders when assessing market structure issues. In what circumstances should an investor be considered a “long-term investor”? If a time component is needed to define this class of investor, how should the Commission determine the length of expected ownership that renders an investor “long-term”? Under what circumstances would a distinction between a long-term investor and a short-term professional trader become unclear, and how prevalent are these circumstances? To the extent that improved market liquidity and depth promote the interests of long-term investors by leading to reduced transaction costs, what steps should the Commission consider taking to promote market liquidity and depth?
Long-term investors include individuals that invest directly in equities and institutions that invest on behalf of many individuals. The Commission is interested in hearing how all types of individual investors and all sizes of institutional investors – small, medium, and large – are faring in the current market structure. For example, has the current market structure become so dispersed and complex that only the largest institutions can afford to deploy their own highly sophisticated trading tools? If so, are smaller institutions able to trade effectively? Some broker-dealers offer sophisticated trading tools, such as smart routing and algorithmic trading. How accessible are these trading tools to smaller institutions? Are the costs of paying for these tools so high that they are effectively inaccessible? Moreover, to the extent that a competitive advantage flows from these trading tools, does that competitive advantage help to promote and enable competition, beneficial innovation, and, ultimately, enhanced market quality? Is there a risk that certain competitive advantages may reduce competition or lead to detrimental innovations? To what extent is it important for market participants to be allowed to gain competitive advantages, such as by using more sophisticated trading tools?
All this and much more in the Concept Release.
And as the charade continues, we encourage all our readers who believe the market is just a joke too big to even fathom (in line with the criminality of the enterprises that hold the US economy "together" at the expense of daily taxpayer rape) to provide their commentary to the SEC.
Readers can access the solicitation form on this website: http://www.sec.gov/cgi-bin/ruling-comments?ruling=s70210&rule_path=/comments/s7-02-10&file_num=S7-02-10&action=Show_Form&title=Concept%20Release%20on%20Equity%20Market%20Structure
And as all comments will end up in the public domain eventually, we hope readers will use the comment section of this post to provide an advance glance of their highly intelligent, very serious, and mission-critical brainstorming which will be summarily downloaded, ignored and ultimately shredded by some lowly SEC janitor.