SEC Regulation SCI Could Push Trading Costs Higher

According to an MFA blog post, the new SEC Regulation Systems Compliance and Integrity (“Reg. SCI”) could lead to higher trading fees for money managers and curtailing operations or closure for some smaller equity trading venues.

The rule would require all trading venues to submit alternative plans for operations in the event of a system breakdown, and require regular testing by the venues to ensure that those alternative plans would work.  In its initial proposal, the SEC said that the estimated initial cost of organizations subject to the regulation would be up to a collective $242 million, with another $191 million in annual costs.

The original story, which was published in Pensions and Investments, quotes Christopher Nagy, founder and CEO of the market structure research firm KOR Group, as saying that “[t]he exchanges will have to pay for the testing, and that will be passed on to execution firms, the brokers.”  Nagy explained that this will raise the bar for the cost of entry and will likely reduce the number of automated trading systems and smaller brokerage firms, causing further cost issues.

Lofchie CommentOne of the ironies of the new regulations is that, for all of the chatter about “too big to fail,” substantial new regulations that impose fixed heavy costs drive up the price of doing business and make it impossible for small firms to succeed.  This is not to say that new regulations are bad (or good), but rather to point out the obvious:  the more heavily regulated the activity, the more likely it is that a small number of very large firms will be able to absorb the relevant regulatory costs.  If the regulators are convinced that reducing risk requires the imposition of substantial “safety” regulations and their accompanying substantial costs, then the regulators must acknowledge that the result of those safety regulations is a highly concentrated industry of very large players.  Put differently, where regulatory actions are creating a concentrated market, the policy consequence should be recognized and embraced.

See: MFA Blog Post; Pensions and Investments Article.
Related news: MSRB Comments on the SEC’s Proposed Regulation SCI (July 3, 2013).