High-frequency trading fees need transparency

U.S. stock exchanges and one of the world’s largest mutual fund companies called for greater public disclosure or elimination of obscure incentives and fees that lawmakers said favor the interests of high-speed traders over other investors.

Executives from Intercontinental Exchange Inc., owner of the New York Stock Exchange, Bats Global Markets Inc., IEX Group Inc. and Vanguard Group Inc. told the Senate’s Permanent Subcommittee on Investigations that rebate fees and payments to brokers for orders should face greater regulatory scrutiny. High-frequency traders now account for about half of U.S. stock trades.

“We are seeking support for the elimination of maker-taker pricing and the use of rebates,” said Thomas Farley, president of the NYSE Group. “Broad adoption of this policy would reduce the conflicts inherent in such pricing.”

Senator Carl Levin, the Michigan Democrat who leads the panel, called the hearing to examine conflicts of interest embedded deep in the plumbing of equity markets that he said are leading to the erosion of investors’ trust and confidence.

Competing interests

“Conflicts of interest damage investors and markets -- first, by depriving investors of the certainty that brokers are placing the interests of their clients first and foremost, and second, by feeding a growing belief that the markets are simply not fair,” Levin said at the hearing.

Brad Katsuyama, president and chief executive of IEX and Robert Battalio, professor at the University of Notre Dame, told the committee that the government should consider forcing greater transparency of market data and incentives.

“There’s been no attempt by the market to solve this issue,” said Katsuyama, a central character in Michael Lewis’s bestselling book “Flash Boys” for his efforts to limit predatory trading strategies. “Therefore the government would be very helpful in helping the industry to coordinate.”

The committee, known for highly-publicized investigations of Wall Street following the 2008 credit crisis, scheduled the hearing amid increasing concern that stock markets and regulators’ ability to oversee them are in need of change. The 2010 flash crash, a series of technological failures and the recent publication of “Flash Boys” have fed scrutiny of high- speed and off-exchange trading.

Trading probed

Eric Schneiderman, the New York attorney general, has subpoenaed high-speed traders including Chopper Trading LLC, Jump Trading LLC and Tower Research Capital LLC as part of a probe into automated trading, a person familiar with the matter said in April. The Securities and Exchange Commission and Commodity Futures Trading Commission are also investigating whether the traders benefit unfairly from better access to data or other incentives.

The SEC, which has been weighing changes to the structure of U.S. equity markets since 2009, is considering its most sweeping plan yet for reining in high-speed trading. The plan would increase registration of proprietary traders and disclosure by brokers and dark pools -- broker-owned venues that compete with traditional exchanges but keep orders hidden until they’re completed.

SEC priority

Enforcing rules for high-frequency trading and alternative trading systems are among the SEC’s priorities, Andrew Ceresney, the commission’s enforcement chief, said today at a Wall Street Journal conference in Washington.

“The markets have changed a lot,” he said. “Algorithmic trading is now obviously the norm in the markets. And the way markets have become much more complex and much more advanced has really focused our attention on this area.”

At the hearing, Joseph Brennan, head of the global equity group at the Vanguard Group Inc., and Joseph Ratterman, chief executive of BATS, also called for greater transparency for how investors’ orders are routed and executed. However, Ratterman said that banning trading incentives would cause harmful disruptions in the market and regulators can properly oversee the industry through additional transparency and enforcement actions.

“While our current equity market structure is not perfect, I believe that it is by far the fairest, most efficient and most liquid market in the world,” Ratterman said.

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