Summarizing Mary Schapiro's Comments On Being Only 20 Years Behind The Market Structure Curve

Mary Schapiro is making some waves at the Economic Club of New York, where for the first time ever, she has given some indication she is only two decades behind the curve when it comes to a market that now has a 5 to 1 ratio of HFT to retail participation (yes, you are all not only frontrun daily, but also surrounded by Sky Net). Here is a summary of her key points from the Economic Club speech earlier, courtesy of Themis Trading.

Here is a brief summary of Mary Schapiro’s speech at the Economic Club of NY which she gave today at 1pm. 

  • Stable fair and efficient market structure are the backbone of our capital markets.
  • If equity market structure breaks down, investors and companies pull back.
  • US equity market structure has changed dramatically in recent years.
  • NYSE executes only 26% of its listed market. 
  • Prop trading firms now play a dominant role in equity market.  They represent more than 50% of volume.
  • 90% of orders are cancelled.
  • Quality of price discovery and a fair, level playing field were questioned in the SEC Concept Release     comment period.
  • May 6th was clearly a market failure.  SEC has already taken some action (circuit breakers).
  • Some have argued May 6th was an aberration. She disagrees.
  • Every single week since May 6th has seen an outflow of funds from equity mutual funds.
  • Impact of severe price volatility.  On May 6th, retail investors use of stop-loss orders to protect themselves backfired on them.  $2 billion of stop loss orders were triggered in that 30 minute period.  This amounts to $200mm in losses if using a 10% conservative price move estimate.
  • Institutional investors are concerned about US equity market structure.
  • SEC has already proposed rules on naked sponsored access, large trader reporting facility and a ban on flash orders.  All are important but likely NOT sufficient.

SEC must look at full range of issues:

  1. Reexamine circuit breakers (errant tripping of circuit breakers).   Will now look at limit up/limit down breakers instead.  She would like both the  trading pauses and limit up/down benefits.  What type of parameters are best for market to not hurt price discovery?
  2. Obligations for HFT – affirmative obligations to support stability of market. Where were the HFT on May 6th? Why did they pull back?  Should todays liquidity providers also    be subject to negative obligations?
  3. Quote Stuffing – does this hurt price discovery?  Minimum time in force for quotations would be one remedy.
  4. Market Fragmentation – Dark pools are increasing (30% of volume) –what is their effect to price discovery?  However, dark Pool volume went down to 10% during Flash Crash.  But institutional investors still fear the lit markets because of predatory trading.

The SEC  will not attempt to turn back the clock.  But the SEC needs to examine if our market structure rules have kept pace with today’s market.