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Statement of Commissioner Robert J. Jackson, Jr. Final Rules Regarding Regulation ATS (Alternative Trading Systems)

July 18, 2018

Thank you, Chairman Clayton, and I want to begin by expressing my deep gratitude and congratulations to Director Redfearn and his colleagues in the Division in Trading and Markets, especially John Roeser and Tyler Raimo, for all they’ve done to get this important rule over the line. Today we take an important step toward shining light on dark pools, and for the reasons Commissioner Stein has emphasized, that transparency is crucial for the future of equity markets—and long overdue.[1]

But as millions of ordinary American investors approach retirement, they are increasingly seeking the safety and stability of fixed income. And those markets are still in the dark ages, costing retirees precious savings.[2] Stock markets are sexy, but fixed income will fund ordinary investors’ retirements.[3] It’s time for the Commission to bring common-sense reforms like those we’re finalizing today to the bond markets that millions of Americans will rely upon for the secure retirements they deserve.

* * * *

As millions of Americans approach retirement age, they are doing what most of them should: they are shifting their investments from stocks to more secure and stable fixed-income investments. Because so many ordinary Americans are doing so at the same time, money is pouring into fixed-income markets at an unprecedented pace. In 2017 alone, more than $400 billion flowed into bond investments—much of it as investors nearing retirement rebalance their investments to meet their family’s new needs.[4]

The changes we’re making today for equity ATSs—requiring disclosure of, among other things, conflicts of interest and when and how an ATS excludes certain traders—reflect years of Staff work and are an important step forward for our stock markets.[5] I’m confident that regulators and investors alike will benefit from the new disclosures provided under today’s rule. And, once other rules that the Division of Trading and Markets is working on—like the transaction-fee pilot and order-routing disclosures—are finalized, our understanding of our equity markets will finally improve after years in the dark.

Despite the progress in our stock markets, fixed-income markets—where millions of Americans are now shifting their investments as they prepare for retirement—remain rife with conflicts of interests and hidden costs. For years, Members of the Commission and finance scholars alike have worried that fixed-income markets do not provide the level playing field that American investors deserve, but we have not yet moved forward with reform in that area.[6]

The result is a market that imposes enormous costs on American investors who need the safety and stability of bonds. Retail investors pay as much as 85 basis points when they trade in this market, many times what it costs to trade stocks.[7] Even small changes to the structure of bond markets could make an enormous difference to the families now preparing for their retirements by investing in fixed income. Because we’ve invested so much time and Commission energy in our stock markets over the past decade, the investor benefits of turning our attention to fixed-income markets would be significant.[8]

That’s why it’s so important that today’s rule includes a clear commitment to review our approach to fixed-income electronic trading platforms.[9] Our Fixed Income Market Structure Advisory Committee has just made several recommendations in this respect, and I urge my colleagues, Director Redfearn, and the Staff to move forward with reform in this area as soon as possible.[10] Millions of Americans have worked their entire lives to reach the point where they are preparing to move their hard-earned savings into the fixed-income investments that will fund their retirements.[11] We should not make them wait any longer to make sure those markets give them the level playing field they deserve.

[1] See Kara M. Stein, Commissioner, U.S. Securities and Exchange Commission, Statement on Adoption of Rules to Increase the Operational Transparency of Alternative Trading Systems (ATS) (July 18, 2018); see also Kara M. Stein, Commissioner, U.S. Securities and Exchange Commissioner, Remarks Before the Securities Traders Association’s 82nd Annual Market Structure Conference (Sep. 2015) (“As more and more trading is routed to dark venues that have restricted access and limited reporting, I am concerned that overall market price discovery may be distorted rather than enhanced.”).

[2] See, e.g., Richard G. Ketchum, Remarks from the Financial Policy Joint Conference on Market Fragmentation, Fragility, and Fees (Sept. 14, 2014) (remarking, nearly four years ago, that it “strikes me as odd that we’ve spent enormous energy in equity markets to measure and save pennies or just basis points on execution quality, while in the fixed income market it’s more a question of nickels, quarters, and dollars.”).

[3] I’m using the word “sexy” loosely, but in financial regulation it’s important to remember that all things are relative. Compare Right Said Fred, I’m Too Sexy (Charisma Records, 1991) (suggesting that someone or something can be, on an absolute basis, “too” sexy, even internationally, i.e., too sexy for “Milan, New York and Japan”). with John Stuart Mill, On Social Freedom: Or the Necessary Limits of Individual Freedom Arising Out of the Conditions of our Social Life, Oxford and Cambridge Rev. 57-83 (1907) (noting, in connection with the notion that measures of utility are appropriately characterized as marginal, that “[m]en do not desire to be rich, but richer than other men.”) and George Sylvester Viereck, What Life Means to Einstein: An Interview, The Saturday Evening Post (Oct. 26, 1929), at 17 (“Relativity . . . merely denotes that certain physical and mechanical facts, which have been regarded as positive and permanent, are relative with regard to certain other facts.”).

[4] See, e.g., Eric Rosenbaum, CNBC Investor Toolkit, Massive Move into Bond Funds Just as Market Gurus Expect Fixed-Income to Disappoint (Jan. 25, 2018) (noting the enormous investor flows into bond funds and citing market participants for the view that much of it is due to portfolio rebalancing “at the retail level”).

[5] See Securities and Exchange Commission, Final Rule, Regulation of NMS Stock Alternative Trading Systems, Release No. 34-____ (July 18, 2018), at 28, 263.

[6] For an especially expert analysis from a longtime intellectual leader in this field, see Larry Harris, Transaction Costs, Trade Throughs, and Riskless Principal Trading in Corporate Bond Markets (working paper Sept. 2015) (estimating the retail costs of bond trading at an astonishing 52 basis points and noting that even “[s]mall changes in bond market structure could substantially improve bond market quality”); see also Maureen O’Hara, Yihui Wang, and Xing Zhou, The Best Execution of Corporate Bonds (working paper Oct. 2015) (providing “strong evidence of best execution failures in corporate bond trading”).

[7] See Harris, supra note 6.

[8] In my view, the law of diminishing marginal returns applies equally to regulatory effort. Larry Summers, The Inequality Puzzle, Democracy (2014) (“Economists universally believe in the law of diminishing returns.”); Stanley L. Brue, The Law of Diminishing Returns, 7 J. Econ. Persp. 44 (1993) (“To explain declines in marginal product . . . as a single competitive firm . . . employs more of these relatively interchangeable inputs, only the law of diminishing returns is adequate.”).

[9] See Securities and Exchange Commission, supra note 5, at 58.

[10] See Securities and Exchange Commission Fixed Income Market Structure Advisory Committee, Recommendation for the SEC to Review the Framework for the Oversight of Electronic Trading Platforms for Corporate and Municipal Bonds (July 16, 2018).

[11] See Alana Semuels, This is What Life Without Retirement Savings Looks Like, The Atlantic (Feb. 22, 2018) (describing the stories of the many seniors in America who lack sufficient savings to retire and, thus, “are stuck with lives of never-ending work—a fate that could befall millions in the coming decades”).

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