High-frequency traders are headed for a belated dressing down. The U.S. Securities and Exchange Commission hasn’t revealed details of its plan to scrutinize the “flash boys” described in Michael Lewis’ book, though more trader and dark-pool oversight seems a no-brainer. The point is that markets are finally set for a major review as investor faith erodes.
The sweeping proposals outlined by SEC boss Mary Jo White at a New York conference on Thursday sound promising. One barring any short-term trading strategies that the regulator reckons could destabilize markets makes a ton of sense. Ensuring that it doesn’t inadvertently favour certain firms and their strategies over others, though, could be tricky.
Also getting high marks is a plan to force market speed junkies to register with regulators so they can keep a close eye on them. It’s less clear that limiting the use of tools for speeding up trading would help investors more than hinder them.
Ms. White also called for making so-called dark-pool trading venues more transparent. The aim would be to force more complete disclosure of securities prices. That could, however, make it hard for investors to remain anonymous. That’s important so that they can protect their strategies and prevent other players front-running them – an age-old stock market problem that dark pools were designed to solve.
Other plans look mostly uncontroversial. It makes sense to try and find out whether broadening so-called tick sizes – the smallest increment by which stock prices can move – would help small companies. The current regime of penny pricing may inhibit liquidity as brokers are less keen to make markets on them.
Fear they won’t be able to sell may dissuade investors from buying such stocks, making it harder for small companies to raise capital, say in initial public offerings. Wider ticks might solve that, but could just boost the bottom lines of market makers without leading to more IPOs.
In any event, offering and then weeding through the various proposals will take some time. Regulators need to be careful about fine-tuning any new rules to avoiding disrupting the markets. The ban on banks’ proprietary trading under the Volcker Rule is a case in point. It took years to develop and yet remains controversial.
Even if the SEC doesn’t ultimately accomplish all that investors may hope, the proposals seem well worth pursuing. Just making the securities markets simpler, more stable and transparent would be a worthy accomplishment.
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