YesYesterday the blue ribbon committee (membership list below) that the CFTC/SEC appointed to examine regulatory risks and make recommendations on how to avoid another flash crash released this report. Most of it reiterates support for measures that have already been proposed or implemented such as single stock pauses/circuit breakers, but there are a few interesting items.
- Commends the SEC for their sponsored access approach (i.e., pre-trade risk mgmt) and pushes the CFTC to do the same. (Could be very positive for Sponsored Access providers like FTEN/Nasdaq, ULLink, Quanthouse, etc.)
- The committee comes out in favor of incenting high frequency traders to make ‘real’ markets. (Could be very positive for Market Making 2.0 operations such as TradeBot & Virtu).
- Recommends a ‘trade-at’ rule which would effectively penalize internalization and preferencing activities by 50 mils—possibly making it an unprofitable business model. (Very negative for traditional wholesale models like Knight, Citadel and Getco, as well as broker-owned dark pools. Potentially positive for non-broker-owned dark pools like LiquidNet, Pipeline and PDQ).
I think the most controversial aspect of the report will be the trade-at rule recommendation. Besides being completely outside the purview of the Committee’s charter, there are too many uncertainties, such as how many wholesale market makers (Knight, Citadel, etc.) might exit the business and what effect would that have on liquidity. So I doubt a rule will get passed or if one does, it will be watered down enough to be largely ineffective.Committee Members
Brooksley E. Born, Retired Partner, Arnold & Porter LL.P, Former Chairman CFTC
John J. Brennan, Chairman Emeritus and Senior Advisor, Vanguard Group
Robert F. Engle, Michael Armellino Professor of Finance, Leonard N. Stern School of Business, New York University
Richard G. Ketchum, Chairman and Chief Executive Officer, FINRA
Maureen O’Hara, Robert W. Purcell Professor of Finance, Cornell University
Susan M. Phillips, Dean and Professor of Finance, The George Washington School of Business, Former CFTC Chairman
David S. Ruder, Professor of Law, Emeritus, Northwestern University School of Law, Former SEC Chairman
Joseph E. Stiglitz, Professor of Finance and Business Administration, Columbia University