The Senate Banking Committee held a hearing titled “The Role of Regulation in Shaping Market Structure and Electronic Trading”. Panelists discussed the regulation of high-frequency trading and offered proposals for technology improvements. Witnesses at the hearing included representatives from exchanges and other financial institutions, including Citadel LLC, Intercontinental Exchange Inc. and BATS Global Markets, Inc.
In general, panelists agreed that high-frequency trading should not be banned, and that technology provides significant benefits to the equity markets. They advocated for increased transparency and disclosure regarding order routing practices and dark pool operation.
Lofchie Comment: Panelists offered a variety of suggestions for addressing high frequency trading and market structure issues. A number of the proposals advocated for very significant changes in the securities markets and securities regulations including eliminating or reducing the role of the securities exchanges as regulators. There were also advocates for reducing tick sizes on securities with substantial liquidity, eliminating maker-taker fees and imposing trade-at rules.
Given the diversity of views, it would seem prudent for the SEC to consider a series of empirical tests of various trading regulations before determining how to amend our current trading rules. In this regard, it may be worthwhile for the SEC to delay launching its test of expanding the tick size rule for small stocks until it can design a more comprehensive program of experimenting with various sets of trading rules. (See commentary on running empirical tests.)