Speech by SEC Commissioner:
Statement at Open Meeting
Commissioner Kathleen L. Casey
U.S. Securities and Exchange Commission
October 21, 2009
Thank you, Madam Chairman. I am pleased to be here and offer my perspectives on the proposing release that we will consider this morning. But first I would like to join you in commending the professional staff of the Division of Trading and Markets for their outstanding work. In particular, I would like to recognize Jamie Brigagliano, Dave Shillman, and Dan Gray.
I support seeking public comment on the proposals before us today, and appreciate the ninety-day comment period. But I think it is necessary for the Commission to first develop a deeper understanding of the whole range of U.S. equity market structure issues before we consider adopting these amendments. In my view, it is important that regulators act with humility. Sometimes we don’t know what we don’t know, and if we rush to regulate without a complete understanding of the extent to which complex and dynamic activities may be interrelated, the specter of unintended consequences looms large. The regulatory process for rethinking market structure, like short selling, needs to be driven by data, not politics or unfounded assumptions.
Here’s what we do know: Competition has transformed the equity markets. We have moved light years from the slow manual trading that once characterized the New York Stock Exchange. We have moved well beyond the NYSE/Nasdaq duopoly. Today, the U.S. equity markets offer more benefits to more investors than at anytime in history. Over the past decade, advances in technology, coupled with paradigm-shifting regulatory actions such as Regulation ATS, have lowered barriers to entry. The resulting vigorous competition for customer order flow among numerous trading venues — including so-called “dark pools” — has led to more choices of trading centers, greater speed and liquidity, financial innovation, tighter spreads, and lower execution costs. Investors, particularly individual investors, have reaped the benefits of the fierce competition that has developed in this area. Therefore, it is imperative that we not take any regulatory actions that would impede or unintentionally reverse this considerable progress.
Markets, including the National Market System, generally operate most efficiently when there is price transparency. The Commission’s longstanding approach to price transparency has been to encourage — but not coerce — market participants to display their trading interest on a fair and non-discriminatory basis. Consolidated market data — that is, real-time information relating to quotes and trades — is the primary means for public price transparency in the U.S. equity markets and is designed to ensure that the public has a single source of reliable information on the best quoted prices and last sale prices for each NMS stock. Of course, investors can also benefit when trading interest is not included in the consolidated quotation data. Speed of execution and cost of execution, to name two areas.
Today’s proposing release concerns the regulation of non-displayed trading interest. These dark pools of liquidity have been around for a long time. Ironically perhaps, the floor of the New York Stock Exchange was the single largest dark pool for many years. Notwithstanding a name that lends itself to sensationalism, there is nothing sinister about dark pools; they exist for legitimate economic reasons. Institutional investors seeking to make large trades have always wanted to avoid revealing the total size of their order. The number of dark pools has certainly increased in recent years, particularly since the advent of decimalized trading, and the way non-displayed stock trading occurs has changed due to technology.
SEC staff has been engaged in a comprehensive review of market structure issues for several years. As former Trading and Markets director Erik Sirri explained in a speech last year, and current acting co-director Jamie Brigagliano reiterated in a speech this past May, the term “dark pool” — absent from the Exchange Act and Commission rules — is not the most precise classification of trading venues. A more useful distinction, in his view, would be based on whether the venue displays quotes as an integral part of its business model. He called those venues “quoting venues” and all others “dark venues.”
Under this classification, exchanges and ECNs are quoting venues and broker-dealer internalizers and dark ATSs are dark venues. He addressed the common concern that dark ATSs are taking market share away from quoting venues and causing the equity markets to become less transparent. The most recent aggregate trading volume data suggests this concern is simply not valid. While it is true that, for example, the NYSE has lost significant market share in its listed stocks, the trading volume is migrating not to dark ATSs but to other quoting venues, such as Nasdaq, NYSE Arca, BATS, and Direct Edge. Dark ATSs are gaining market share at the expense of the other dark venue: brokers that internalize orders.
This trading volume migration from the incumbent exchanges to other venues that publicly display trading interest demonstrates the robust competition among trading centers for customer order flow. It also demonstrates that non-displayed liquidity has not materially reduced the quantity of publicly disseminated trade information. Therefore, it appears that an obsessive focus on the rise of dark ATSs is misplaced. Quoting venues in the aggregate are doing just fine, and the competition among them is a good thing, not something we need to “correct.”
Nonetheless, it is important that the Commission carefully review whether our rules and the joint-industry plans that we oversee need to be revised and updated to address the potential emergence of a two-tiered market that affords preferential treatment to selected market participants at the expense of individual investors.
I look forward to reviewing all of the public comments on this release. I also look forward to the upcoming concept release that will solicit comment on a wide range of related issues. I want to thank Chairman Schapiro for her strong leadership on this and other issues, and would like to ask the Trading and Markets staff just a few questions.