Think of it as the day when Flash Boys came to Washington.
Brad Katsuyama, the Canadian hero of the Michael Lewis bestseller, was one of six witnesses who testified on Tuesday before a congressional subcommittee. Its goal: To investigate some of the book's claims about the less savoury aspects of high-frequency trading – or whether, as Mr. Lewis put it on national television, "the stock market's rigged."
There were no such dramatic claims in Tuesday's hearings, which at times went so far into the minutiae of market structure that the senators questioning the witnesses seemed lost. Yet in some ways this was exactly the point – that the workings of today's markets are not just too complicated but in many cases opaque, even to experts.
John McCain, a Republican senator from Arizona, asked Mr. Katsuyama if he thought the markets were rigged. "We've discovered that investors are systematically disadvantaged in the way the markets are set up," answered Mr. Katsuyama. But he added that the use of such a "loaded" term gave ammunition to critics.
Mr. Katsuyama urged policymakers to address four conflicts of interest faced by brokers and exchanges: the complex system of rebates and fees that gives brokers "perverse incentives when deciding where and how to route trades"; the practice of isolating client orders on internal "dark pools" rather than on public exchanges; the predatory strategies employed by some high-frequency traders; and the way traders use "co-location" strategies to execute trades fastest based on who is physically closest to the server.
(IEX Group, the trading platform run by Mr. Katsuyama, was created to eliminate these conflicts. It has a limited number of order types, charges a uniform fee to both sides of a transaction and instituted a technological speed bump to blunt the advantage of certain traders.)
One telling moment occurred during the questioning of Steven Quirk, senior vice-president at TD Ameritrade, the retail brokerage partially owned by Toronto-Dominion Bank. Mr. Quirk said that nearly all of the broker's limit orders – that is, orders that do not have to be placed immediately – are routed to the trading venue that pays the highest rebate to receive such traffic. Critics allege that such a practice can result in customers receiving less advantageous pricing.
A majority of the participants in Tuesday's hearing asked the government to change the current market structure, with the requests ranging from small tweaks to dramatic revisions. Thomas Farley, president of the New York Stock Exchange, said that his organization had imposed a six-month moratorium on any new order types as a step toward "reducing complexity."
He said the U.S. should get rid of the system of rebates and fees for trades and copy a page from Canada's playbook – namely, ensure that venues where price quotes are visible get priority over dark pools.
Unlike reading Flash Boys, Tuesday's hearing wasn't a breezy and engaging experience. But it's a sign that the interest in reforming U.S. markets shows no signs of flagging.