Jim McTague explores in his latest “D.C. Current” column for Barron’s the potential mischief tied to government efforts to “do something” about the latest public policy problem.
The real disaster spawned by the three-hour shutdown of the Nasdaq OMX market on Aug. 22—because of a glitch in the price reporting system co-owned by 15 exchanges (including Nasdaq)—is that the Securities and Exchange Commission now has impetus for a half-baked regulatory “solution” for providing trading-system integrity. We’ll learn more about this on Sept. 12 when SEC Commissioner Mary Jo White takes exchange officials to her woodshed for a public spanking.
A regulatory whipping could not be given to a more deserving bunch of ne’er-do-wells. Ensuring the integrity, stability, resiliency, capacity, and availability of the electronic securities markets for years had been a voluntary endeavor, with guidelines furnished by the SEC. The exchanges spent enormous sums to expand the bandwidth of the market price reporting system, primarily so that they could accommodate the frenetic buying and selling of their best customers—high-speed robots that flood the markets with buy and sell orders. The evidence of the past few years, including several major market breakdowns, arguably suggests that the exchange meisters have not devoted adequate time and resources probing the elaborate trading and reporting systems for vulnerabilities.
Even so, there is awfulness in having the SEC jump in to micromanage the exchanges. The regulators, at desks far removed from Wall Street, know much less about market plumbing than do the people who run the system. In fact, it was the SEC’s well-intentioned micro-managing of markets between 1998 and 2006 that resulted in our current accident-prone exchange system. SEC dictates on order-routing and market structure channeled Rube Goldberg.
AT 377 PAGES LONG, THE SEC’s proposal for taming the new technological systems boldly eschews elegance and simplicity. Each time a computer hiccups, reports would have to be filed. Definitions in the regulation are vague and its requirements are often duplicative. The proposal, known as Regulation SCI and drawn up in March, also invites crony capitalism, evidenced by a call from the NYSE Euronext for SCI to cover broker-dealers and automated trading systems.