Monday, November 19, 2012

SEC contemplating more scrutiny of order types on NYSE

After multiple problems with high frequency trading and Initial Public Offerings gone awry, matters discussed many times here on Muzungu, the Securities and Exchange Commission is exploring the idea that more extensive regulation & scrutiny is needed on the exchanges. According to a recent Wall Street Journal article, the SEC, run by Mary Shaperio (whose picture int he story clearly illustrates how difficult a tenure she has had at the helm of the the SEC), believes that high-frequency orders have received special treatment on the floor which is not really legal. All order must be treated the same. If some orders have more information or are given preference over other orders then the systems has broken down. The entire idea of an exchange is fairness of treatment. Otherwise, everything should be specially arranged like private agreements between buyer and sellers.

The entire purpose of an exchange is economies of scale and uniform treatment of orders. This is the way to a more sophisticated level of trading inside the building and not outside under the Buttonwood tree. How is it that the oversight regulator lost sight of this? How is it that Congress lost sight of this?

Regardless, regular investors must have the same opportunities on exchanges as the institutional or sophisticated investor. HA! That has never happened. The institutional trader has ALWAYS had an advantage on exchanges. It is the nature of the beast. They trade more and have contacts on the exchange floor. It is how it is. However, the exchange regulator must make sure that that advantage is not too great.
This is what is taking place right now.

While high-frequency traders (HFT) make up to 50% of the trading volume on exchanges, the question is did exchanges HELP them...either through commission or omission. I don't really know but if forced to speculate, the exchanges failed to stop the dominance of HFT's....hence no level playing field. Now enough people have complained so it is time to act.

We shall see what they come up with. I believe the SEC is fatigued. I do not think Mary Shapiro intended to be SEC Commissioner another term. She is done and worked hard. We shall see is new changes actually come to be.

Of course, my final thought is this, we (the WEST) do actually feel entitled to tell Africa how to regulate its exchanges. I still think this is ok. I believe that the NYSE faces challenges not currently faced by African Exchanges, and yet the small illiquid exchanges of sub-Saharan Africa so not need to follow in our exact footsteps and can leapfrog these particular difficulties.

I do hope things calm down so I can head to Egypt next week!              

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