SEC faces opposition to planned share trading rules change
US markets regulators are facing fresh opposition to their plans to amend stock trading rules that could pave the way for the approval of the trading venue IEX Group as a new exchange.
Supporters and critics of IEX recently sent letters to the Securities and Exchange Commission that raise concerns the proposals could complicate markets and hurt investors.
Authorities have been caught within the web of their own rules by the application from IEX, which rose to fame as the centrepiece of Michael Lewis’s book Flash Boys.
To navigate around what it argues is a market dominated by high-frequency traders preying on other market participants, IEX plans to introduce a speed bump of just 350 microseconds on its market.
That has jarred with rules that stipulate investors get the best prices immediately, which is complicated by inefficiencies in the technology and geographic distances between exchanges around New York and Chicago. To resolve the issue the SEC has suggested anything less than a millisecond qualifies as “immediately”.
Academics, high-speed traders and asset managers submitted their replies as the deadline for public response ended last week.
“We are concerned that the SEC’s proposal would likely introduce significant unnecessary market complexities and create significant risks for investors,” wrote William Stephenson, global head of trading at Franklin Templeton Investments, which manages $742bn of assets. “We worry that the SEC’s proposal could create future unknown conflicts that simply reside in a one millisecond world.”
Franklin Templeton was joined by the Committee on Capital Markets Regulation, a high-profile US markets advisory group with representatives from banks, lawyers, private equity and asset management. It warned the market structure could change significantly if exchanges could apply delays to some market participants but not others.
“This could distort markets and it is unclear whether selective application of intentional delays would be beneficial for long-term investors or the equity markets,” it said.
The FIA PTG, a trade association of high speed traders, warned the rule risked turning the US market into “a hall of mirrors where it’s impossible to know which prices are real and which are latent reflections” and one more open to manipulation.
Critics of IEX’s attempt to become an exchange, such as Nasdaq, have praised the SEC’s decision to engage in a wider discussion of market rules rather than “ad hoc policymaking” through IEX’s application, but it still opposed the interpretation.
Franklin Templeton urged the SEC to approve IEX’s exchange application, which would put it on equal footing with the likes of Nasdaq and the New York Stock Exchange without delay. The SEC is due to make a decision on its proposals by mid-June*.
*This article was amended from the original to correct the due date