WASHINGTON--Market executives called for an overhaul of stock
market trading rules in a Senate hearing Tuesday, saying the shift
to high-frequency and off-exchange trading has created too much
complexity that favors the most sophisticated investors.
The hearing, the second by the Senate Banking Committee on
computer-driven trading in the past month, comes amid heightened
scrutiny of off-exchange venues such as dark pools and
high-frequency trading, which accounts for about half of all
trading in U.S. stocks.
Jeffrey Sprecher, chief executive of IntercontinentalExchange
Inc., which owns the New York Stock Exchange, said at the hearing
that regulations have led to an overly fragmented and complex
market in which too much trading takes place away from stock
exchanges. Such complexity "hurts market confidence and I believe
deters some investors and entrepreneurs from accessing the public
markets," Mr. Sprecher said.
Kevin Cronin, global head of trading at asset manager Invesco
Ltd., with $790 billion under management, said regulations have
encouraged market fragmentation, which can favor sophisticated
traders.
"Markets have become too complex and fragmented not because they
need to be but rather because we have allowed them to become so,"
he said, adding that complex rules governing dark pools "have
facilitated an unlevel playing field that unfairly favors
sophisticated participants over ordinary investors."
Two weeks ago, New York Attorney General Eric Schneiderman
alleged in a complaint that Barclays PLC lied about how it favors
high-frequency traders in its dark pool. Securities and Exchange
Commission Chairman Mary Jo White in a speech in New York last
month vowed to ratchet up oversight of computer-driven trading and
dark pools, which don't post traders' buy and sell orders, only
reporting trades after they are executed.
Stock trading in the U.S. has seen an increase in "complexity
and instability in the system," said Sen. Tim Johnson (D, S.D.),
chairman of the committee, said at the hearing. While trading has
evolved dramatically in recent decades, "many rules and market
conventions date back to the days of less complex markets."
Kenneth Griffin, chief executive of Chicago hedge fund Citadel
LLC, said dark pools can favor some trading firms over others,
giving them unfair advantages. Some dark pools "may refuse access
to certain market participants...and charge different fees to
different types of participants," he said. Many dark pools also
"offer economic inducements to broker-dealers and high-frequency
traders to route their orders to them," Mr. Griffin said.
Mr. Sprecher, reiterating a concern he has voiced several times
since ICE purchased the New York Stock Exchange last year, called
for the elimination of a fee and rebate system known as "maker
taker." He said the system adds to "the complexity and the
appearance of conflicts of interest." Mr. Sprecher also said
regulators should favor public exchanges, which he said add to
price discovery for stocks, over more opaque off-exchange venues
such as dark pools.
Sen. Elizabeth Warren (D., Mass.) questioned the market benefit
of high-frequency trading, since many high-speed firms only hold a
stock for a few seconds or minutes before selling it to another
firm. "I'm trying to figure out how that adds more liquidity to the
market if that seller would have found that buyer" without the
high-speed firm jumping in the middle of the transaction, she
said.
"We are worried about excessive intermediation in the markets,"
Mr. Cronin said in response to her questions.
Write to Scott Patterson at scott.patterson@wsj.com
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