Exchanges urge overhaul of trading rules

Market rules that have fuelled the need for speed in trading should be overhauled to restore investor confidence, stock exchange executives and high-frequency trading participants told US senators on Tuesday.

“The markets are too complex,” said Jeffrey Sprecher, head of the IntercontinentalExchange, which also owns the New York Stock Exchange. “They’ve lost track of trying to get the best price for a company trying to raise money.”

Thomas Wittman, executive vice-president of Nasdaq, told a Senate hearing that investor demand and regulatory complexity had made US markets “lightning fast, fragmented and deeply interconnected.” He added that: “This complexity has added many more friction points where mistakes can occur.”

The hearing came as regulators and law enforcement officials are scrutinising high-frequency trading amid allegations that it is rigging markets against traditional investors. Much of the focus has been on the “dark pools” where investors can trade large blocks of shares anonymously off exchanges.

Two weeks ago, the New York state attorney-general sued Barclays for allegedly favouring high-speed traders using its dark pool while misleading institutional investors. Senator Jack Reed told Tuesday’s hearing that such allegations contributed to scepticism in the market.

The Senate hearing focused on what regulators could do to restore investor confidence. Mary Jo White, head of the Securities and Exchange Commission, in June announced several sweeping initiatives to bring more transparency to high-frequency trading, including examining SEC rules to see if they have contributed to problems in the market.

While participants in Tuesday’s hearing said they supported Ms White’s proposals, some urged her to go further. They focused in particular on the regulation known as Reg NMS, which requires that investors be able to obtain the best possible price on stock trades. This has been blamed for complicating markets by spurring fragmentation, resulting in 13 exchanges and about 50 dark pools.

Ms White said the SEC would examine certain provisions of Reg NMS, but some hearing participants said the SEC needed to look at the entire rule. Some SEC commissioners have suggested scrapping it all together.

The markets are too complex. They’ve lost track of trying to get the best price for a company trying to raise money

Ken Griffin, chief executive of Citadel, one of the biggest high-frequency trading companies, called on the SEC to lower the “access fees” that exchanges can charge brokers to enter the market, which are part of Reg NMS.

For certain stocks, exchanges can charge a maximum of 30 cents per 100 shares to access a stock quote. Exchanges often use those fees to offer rebates to brokers who increase liquidity in the market, which is known as the maker-taker model.

Mr Sprecher has gone further by calling for an end to the maker-taker model, a suggestion he repeated on Tuesday.

Senator Sherrod Brown, a fierce Wall Street critic, asked Mr Sprecher if he would eliminate more order types that allow high-frequency traders to jump ahead in the line to execute their orders.

Mr Sprecher said he would work to reduce order types further, but said the computers used to route orders were part of the problem. He added that he was speaking publicly in the hope that other exchanges would also move in that direction.

“I need to put pressure on all my colleagues to take my lead,” Mr Sprecher said.

Mr Griffin also took aim at the exchanges, saying the special status of those self-regulated entities created conflicts of interest that needed to be reduced.

“This conflict of interest in the dual role of regulator and competitor has led to inconsistencies in the manner in which the exchanges regulate their members,” he said.