Ferguson op-ed: U.S. stock markets put investors first

The Hill

 

Public exchanges today offer trading and data services that are more valuable, efficient and resilient than at any time in history and at the lowest cost to investors. Recent suggestions otherwise by exchange critics are unfortunate and overlook several important realities about how our capital markets work today.

 

Public exchanges today offer trading and data services that are more valuable, efficient and resilient than at any time in history and at the lowest cost to investors. Recent suggestions otherwise by exchange critics are unfortunate and overlook several important realities about how our capital markets work today. 

For starters, all capital markets participants are “for profit” — investors, market makers, banks, brokers, venue operators, issuers, traders and everyone else. There is no such thing as a not-for-profit capital markets participant.

When today’s for-profit national securities exchanges were still member-owned, it was the broker members who retained the profits exchanges earned, enabling the exchanges to remain technically “not-for-profit.”

But then and today, public exchanges remain the most heavily regulated and transparent participants in our capital markets. They are required to compete with over 50 alternative trading systems, more commonly known as dark pools, which are all run by financial institutions and on which 40 percent of equities trading occurs.

In contrast to public exchanges, dark pools are subject to lighter regulation and can discriminate among customers by negotiating undisclosed fee arrangements with each of them.

This complex, fragmented market structure is a result of the Regulation National Market System (Reg NMS), not exchanges’ ownership structure. Reg NMS precipitated the need for market participants to demand greater access to information and connectivity at faster and faster speeds. 

The Securities and Exchange Commission (SEC) introduced Reg NMS with the stated goal of creating greater competition for exchanges and other trading venues at the behest of investors seeking lower costs to trade. It also promoted the use of automated trading systems at the expense of manual open outcry trading floors.

This has forced exchanges to evolve and modernize. But this also required significant systemic and technological changes. Becoming listed entities in their own right enabled exchanges to access the capital markets — like any other for-profit entity — to make the technology investments to compete and deliver the services their clients demand.

Reg NMS was successful in its goal. We now have more than 13 equities exchanges competing aggressively for both listings and trading market-share. This competition is what constrains prices for the well-funded trading firms that buy proprietary data.

The exchanges compete not only for consumers of analytical, data and index products, but for the order flow that is the very lifeblood of their existence. 

Adding to this landscape, they also compete against their own clients — large investment banks and broker dealers, who through these Reg NMS changes are even better able to act as quasi exchanges by matching the buy and sell orders received from their clients without sending them to an exchange.

In this more-fragmented market, data and access are critically important. Price discovery and trade execution are more efficient today because of public exchanges’ investments in technology, not in spite of them.

Lit quotes — posted by liquidity providers on public exchanges — are the raw material that allow every market participant to trade with confidence. They even power the dark pools, which rely on displayed quotes from the public exchanges to match buyers and sellers on their internal trading platforms.

The reality is transaction costs for investors are the lowest they’ve ever been. They also enjoy instant access to robust real-time market data on their smartphones, for free.

This is no accident; it’s the result of significant investment by exchanges to ensure ”The Tape” is of the highest quality and speed, all while the cost to investors has declined. 

Given that the majority of retail trades are executed in the dark pools, shouldn’t the SEC focus its attention there rather than on a corner of the market that is already the most transparent and heavily regulated?

The path recently proposed will push more and more trading onto the dark pools, and that will lead to a significant erosion of market quality as the percentage of the market represented by lit quotes declines.

The answer to strengthening the quality of our free market is in free-market principles, not government price-fixing. If exchanges are turned into public utilities, then competition decreases, and investors will ultimately lose.  

Furthermore, there is no evidence that government price-fixing will have any impact on individual investors, particularly when it does not appear that the prices will be fixed everywhere a trade can happen, data can be sold or technology services can be provided.

Selective overregulation of exchanges, through pilots or otherwise, without consideration of the other 40 percent of the market where transactions occur is more likely to simply be an additional boost to the record profits of big Wall Street firms and unregulated third-party data providers who are looking for government intervention to minimize their costs. Exchanges believe customers are best suited to control costs in a competitive environment. 

Today, the fees that exchanges charge for data services are reasonable. In fact, our collective revenues are one one-tenth of the $12 billion in revenues collected by thid-party data providers who take exchange data and resell it to market participants at significant markups. 

According to the dark pools, we should put our faith in them. We can’t see what’s happening there, so we’ll just have to trust them.

Free markets operate best when providers compete in a transparent environment. The well-funded institutions would benefit from government price controls, but in the end, the individual investor pays the price for stifled competition.

Former Rep. Mike Ferguson (R-N.J.) is the executive director of the Equity Markets Association, a cooperative whose membership includes the Nasdaq and the New York Stock Exchange. He is a senior advisor of Baker Hostetler. 

https://thehill.com/opinion/finance/408998-us-stock-markets-put-investors-first

The Stock Market is in Good Hands

Mike Ferguson and Mike Williams

Equity Markets Association

  • In this op-ed, Mike Ferguson and Mike Williams at the Equity Markets Association argue that a recent transparency initiative shows that stock market infrastructure is in good hands.

  • The association was founded by Intercontinental Exchange, the parent company of the New York Stock Exchange, and NASDAQ.

  • “Some critics have recently called into question the effectiveness of our market,” they write. “And to be sure, we are not immune to imperfections. But we are proud to be an industry that mandates specific processes for continual review, investment, and improvement.”

American investors today benefit from an efficient, well-regulated and easily accessible financial system that is both trusted and respected globally.

This means that all investors—from sophisticated financial institutions to average American workers with 401(k) accounts—can now transact in securities more easily and cheaply, using far better information, than ever before.

Some critics have recently called into question the effectiveness of our market. And to be sure, we are not immune to imperfections. But we are proud to be an industry that mandates specific processes for continual review, investment, and improvement. And we can demonstrate these investments and improvements in tangible ways.

For example, a major transparency initiative last month by a committee of U.S. stock exchanges and FINRA revealed that the public and the financial industry is paying less for up-to-the-second stock market data than they were a decade ago, even as data quality, availability, and speed have increased.

The headlines in Bloomberg News and elsewhere appropriately focused on the declining data fees, which corrects the record on claims by some Wall Street firms that market data costs are uniformly rising, or too high. Indeed, the data show that the total cost of consolidated market data distributed by the securities information processors that supply vital market information have actually decreased over the last decade when accounting for inflation.

That’s good news, but there’s more.

The Equity Markets Association, which represents two of the largest regulated exchanges, also believes the transparency initiative itself deserves more attention, as it sheds light on the critical data infrastructure that gives investors protection and confidence—at little to no cost to retail investors, and at a low cost to the securities industry.

First, a brief primer on the securities information processors. The SIPs, as they are known, provide a consolidated feed of real-time quotes from U.S. exchanges and real-time trades across all U.S. exchanges and non-exchange markets. This uniquely American service, overseen by the SEC, consolidates all quotes and trades into easily consumable data feeds, which are distributed to the investing public through brokers, the media, and resellers of financial information. Most of the general investing public has benefitted from the SIPs at no cost.

As required by SEC rule, the exchanges and FINRA operate the SIPs. Participating exchanges and FINRA are self-regulatory organizations with strict legal obligations, enforced by the SEC, to comply with SEC rules on market data dissemination, including requirements on the fair and equitable allocation of fees for this data. To meet their regulatory and compliance obligations, the exchanges and FINRA oversee the operation of the SIPs.

The consumers and re-distributors of this data, many of them representatives of securities firms, participate in the governance of the SIPs through a strong advisory committee representing the sell side and buy side communities. While we strongly believe these firms do have a critical role in governance of the SIPs, it’s important to also note that exchanges and FINRA have regulatory obligation to comply with SEC requirements regarding consolidated data. The securities firms do not.

Some securities firms desire more power in governing this critical infrastructure. Other market participants have criticized the governance structure of the SIPs, asserting that advisory committee members, notwithstanding the absence of legal obligations to comply with SEC requirements regarding consolidated market data, should have an equal vote to the exchanges and FINRA who do bear regulatory risk for the SIPs.

The Equity Markets Association welcomes heightened public discussion and awareness of the SIPs. But we think the SEC was wise in having this critical market infrastructure be run by entities that have the legal and regulatory obligations to meet the rigorous requirements under SEC rules. The broader investing public’s interest is channeled through the SEC, which oversees the SIPs, creating an important check on regulated exchanges, FINRA and non-regulated firms alike.

Critics have claimed that the exchanges have no incentive to improve or invest in the SIP, because these market feeds compete with the exchanges' proprietary data businesses. This suggestion ignores the substantial improvements the exchanges, as SIP operators, have made to the SIPs. As with all sectors that rely on information, massive advances in data technology and analytics in recent years have transformed the financial markets, sparking innovation, competition, and increasing demand for data. The SIPs—both the CTA/CQ Operating Committee and the UTP Operating Committee—have responded to this demand by increasing the speed, capacity, and resiliency of their data feeds.

When market participants sought more transparency about SIP operations, the exchanges and FINRA responded with ramped up public disclosure detailing governance meetings, performance metrics, pricing schedules, and technical specifications. Last month's transparency announcement added current and historical revenue to the mix of enhanced disclosures, which showed that overall SIP revenues have decreased over the last decade despite a massive increase in volume running through the feeds.

We are committed to pushing for continual improvements of the SIPs. They are a vital part of our markets and regulated exchanges and FINRA take their public duty seriously. But let's also acknowledge that U.S. market participants are getting a continuously more valuable product, faster, at lower cost, amid growing information flow. It’s working.

EMA releases whitepaper on importance of market data to investors, regulators

The market data used by professional and nonprofessional investors – as well as by federal regulators – is a critical component to the transparency of U.S. equity markets, according to a new report by the Equity Markets Association (EMA), an industry association representing the interests of U.S. exchanges.

In a whitepaper issued for federal policymakers, the EMA report provides an overview of market data’s role in the U.S. capital markets, including identifying different types of market data, the role of consolidated Security Information Processor (SIP) market data, and the responsibility for and governance of SIPs.

The full report, “The Importance of Market Data to the U.S. Equity Markets,” can be accessed by clicking here

EMA was established in 2015 to provide federal policymakers, regulators and investors with in-depth policy analysis on important issues that impact the U.S. equity markets. Founded by Intercontinental Exchange, Inc., which operates the New York Stock Exchange (NYSE) Group of exchanges, NASDAQ, EMA promotes federal policies that safeguard a transparent marketplace, incentivize capital formation and ensure a robust secondary market for securities trading.

Previous published EMA reports include “The Anatomy of a Trade,” designed to provide policymakers with visibility into how trades are executed, from retail investors trading through online services to market makers. Stacey Cunningham, chief operating officer of the NYSE Group, and Frank Hatheway, NASDAQ’s chief economist, led separate discussions earlier this year for the staffs of the House Financial Services Committee and the Senate Banking Committee on the mechanics of how trade orders are executed.

EMA is led by co-directors former Rep. Mike Ferguson and Mike Williams. Ferguson leads the federal policy practice at Baker Hostetler LLP. Williams is the founder of The Williams Group.

EMA hosts congressional staff briefing on ‘Anatomy of a Trade’

  Leading the discussion of the Equity Markets Association congressional staff briefing were Frank Hatheway of NASDAQ (left) and Stacey Cunningham of the NYSE Group.

Leading the discussion of the Equity Markets Association congressional staff briefing were Frank Hatheway of NASDAQ (left) and Stacey Cunningham of the NYSE Group.

A fair and transparent marketplace open to all investors is key to ensuring companies can access the capital they need to expand their businesses and create jobs, two market officials said Wednesday at a congressional staff briefing.

The briefing was hosted by the Equity Markets Association, on which Intercontinental Exchange, Inc., the parent company of NYSE Group, and NASDAQ are founding members. More than 5,000 companies are publically traded on the EMA members’ exchanges.

Click here to download the PowerPoint distributed to congressional staff during the briefing for staff of the House Financial Services Committee and staff of lawmakers who serve on the committee. The briefing, “Anatomy of a Trade,” was designed to provide staff with visibility into how trades are executed, from retail investors trading through online services to market makers.

Stacey Cunningham, chief operating officer of the NYSE Group, and Frank Hatheway, NASDAQ’s chief economist, led the discussion into the mechanics of how trade orders are executed. 

“We’re all fundamentally in the trust business,” Hatheway said. “Stock markets should work for all investors, and you shouldn’t have to be sophisticated to benefit from them.”

Cunningham said it’s incumbent on the exchanges to be transparent and educate consumers – as well as federal policymakers – to ensure investors can effectively participate in the market.

  Michael Williams (left) and former Congressman Mike Ferguson participated in the Equity Markets Association congressional staff briefing. Ferguson and Williams serve as EMA co-directors.

Michael Williams (left) and former Congressman Mike Ferguson participated in the Equity Markets Association congressional staff briefing. Ferguson and Williams serve as EMA co-directors.

“Because of the complex systems involved in trading equities, it’s important that we educate consumers,” Cunningham said. “Transparency and openness helps to protect investors, especially those who may not have specialized knowledge.”

EMA co-directors former Congressman Mike Ferguson and Michael Williams also participated in the briefing. 

In additional to providing congressional staff with an overview of U.S. equity markets, the briefing also focused on market participants, regulatory structure and how trade orders are executed.

This was the first of a series of EMA-hosted briefings for congressional staff. Additional briefings will focus on the role of a self-regulatory organization, market data, the impact of a financial transaction tax and cybersecurity issues.

EMA founders urge Congress to oppose adding non-SROs as voting members of NMS plans

The two founding members of the Equity Markets Association urged key congressional leaders to oppose legislation that would add non-Self-Regulatory Organizations as voting members of National Market Systems plans.
 
The Equity Markets Association was established in 2015 to provide federal policymakers, regulators and investors with in-depth analysis on important issues that impact the U.S. equity markets. Its founders, Intercontinental Exchange, Inc. and NASDAQ, wrote to House Financial Services Committee Chairman Jeb Hensarling and Rep. Maxine Waters, the top Democrat on the committee, about legislation that would change how NMS plans operate.
 
Also signing the letter were the Chicago Board Options Exchange, Inc., the Chicago Stock Exchange, Inc., the International Securities Exchange, Inc., and the Options Clearing Corporation.
 

The letter can be downloaded here  →

New Equity Markets Association to provide voice on financial markets policies and issues

Washington, D.C., December 15, 2015 – The Equity Markets Association, a cooperative whose mission is to regularly provide policy makers, regulators and market participants with perspectives on important issues that impact the equity markets, launched today. The initial members of the Association are Nasdaq and the New York Stock Exchange, the primary exchange venues in the United States for the listing and trading of approximately 5,000 public companies. In conjunction with the launch, the Association released its inaugural white paper focused on the role equity markets play and a discussion of key market structure issues.

The Association, based in Washington, D.C., is led by former Congressman Mike Ferguson of Ferguson Strategies, and Michael Williams of The Williams Group.   

Serving in Congress from 2001 to 2009, Ferguson represented New Jersey’s 7th District and served on the Energy and Commerce Committee and House Financial Services Committee. He also worked on the drafting of the Sarbanes-Oxley Act of 2002.  

In addition to holding senior public policy roles for Credit Suisse and the Securities Industry and Financial Markets Association (SIFMA), Williams served as Special Assistant to the President and Staff Director for Legislative Affairs during the Clinton Administration, where he was a key member of the White House team responsible for developing and implementing the Administration’s agenda on financial services, tax and international trade legislation. 

“This Association will be an important voice on issues that impact the nation’s capital markets,” said Ferguson. “Exchanges play a unique role in the capital markets and EMA will now provide policy makers with exchange perspectives on important issues impacting investors, issuers and equity market intermediaries.”  

“Exchanges are economic engines of our economy, vital to growth and job creation,” said Williams. “The EMA will allow us to share deeper insights with opinion leaders regarding the operation of the capital markets in the context of policy and regulation.”