SEC Commissioner Dan Gallagher has got a tough job. His critics are many, and his career depends on keeping the markets fair, transparent, and honest. More often than not, however, he is forced to defend himself and the stock market. In a recent interview with CNBC, after participating in the annual Securities Traders Association Market Structure Conference in Washington, Gallagher stressed the importance of taking a closer look at the structure of the US stock market. To put it more bluntly, he thinks an entire overhaul is needed, especially in terms of regulations, and control.
Are the current equities market regulations outdated?
If you ask most people on Wall St., the answer is YES; but why? The current SEC regulations were developed around 40 years ago. And while amendments have been made to certain regulatory practices, the majority of the equity market regulations have remained the same. The market, however, has changed drastically, and therein lies the problem. Gallagher acknowledges the need to update regulations, but won’t do so without studying the potential impact first. The markets have changed with technology, and as so, it’s critical that the SEC’s regulations change along with them.
Another issue Gallagher spoke about was the potential for a liquidity crisis, if regulations for the fixed-income market aren’t examined and updated soon. According to his interview with CNBC, he thinks, “the fixed-income market is more thinly traded than many think and could easily suffer from a “liquidity crisis”; the method by which bonds are priced is too opaque and needs to be overhauled.” Other members of the SEC regulatory committee also share this sentiment. Many believe that trading methods have changed so drastically in recent years, that an overhaul is not only necessary, but also inevitable.
Gallagher: “SEC needs to hold a holistic review”
Gallagher firmly believes that self-regulation, specifically in terms of the Self-Regulatory Organization (SRO) model, by which stock exchanges regulate themselves, needs to be thoroughly reviewed. The SRO model currently allows stock exchanges to self regulate, but at what cost? The SRO rules only apply to authorized exchanges. However, according to recent data, nearly 40 percent of all trading occurs in what’s known as Alternative Trading Systems (ATS). These ATS’ are almost all unregulated, setting up a conflict of interest when trading with the previously mentioned SROs. Gallagher, and others, believe that all of these markets should be regulated under one roof. However, under the current SRO model, it’s not a likely possibility.
He insists that “the heavier regulatory burdens exchanges operate under put them at a competitive disadvantage and that it is time to examine whether all trading participants should be brought under one regulatory scheme.” Gallagher also insists that the SEC should focus more on broker-dealers, and how to get them to adhere to better execution practices, rather than solely focusing on exchanges.
Another key point that Dan Gallagher made this week was the need for the SEC to examine their staffing priorities. Perhaps even change them. Under the current standard, the office that oversees business at the equities and options market is staffed by well over 100 SEC employees. This is a big imbalance of resources when you compare it to the staff that oversees municipal bond trading, which is a team of six. It’s clear that his goal is to move a good share of responsibility back to the bond market, especially with the high demand that electronic bond markets, and bond trading, have produced.
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