Reading the Tea Leaves in the SEC’s New Equity Market Structure Advisory Committee

            On June 5th, 2014, SEC Chair Mary Jo White delivered a landmark speech on “Enhancing Our Equity Market Structure” in which she announced the formation of a new Market Structure Advisory Committee. On January 13th, just a shade over seven months later, the committee members were announced. While we can’t predict exactly what the coming year holds for this committee, its members offer us some pretty telling clues. So if you will allow it, we’ll treat the Advisory Committee’s newly named participants as tea leaves from which to divine the future. It helps that there are a lot of familiar names on this list, a fact which makes our fortune-telling venture just a little bit easier.

  • Matthew Andresen, Co-Chief Executive Officer, Headlands Technologies LLC – Headlands Technologies is a proprietary trading firm that focuses on Futures and Bonds. So why pick Andresen? Well, prior to  his services as CEO at Headlands, Citadel and Sanford Bernstein, Andresen was CEO of Island ECN, one of the first Alternative Trading Systems post SEC Rule 301 enactment. Andresen is widely credited for instituting the maker-taker fee structure that now permeates both the equity and options marketplaces. In fact, when it adopted Regulation NMS, the SEC essentially took its fee schedule from Island’s maker-taker scheme. If the SEC is looking to transform the M/T model, enlisting a pioneer of the practice is a great starting point.
  • Reginald Browne, Senior Managing Director & Global Co-Head, ETF Group, Cantor Fitzgerald & Co. –If you are a trader, and particularly if you dabble in ETF’s, then you know that Reggie Browne is the leading behind-the-scenes force in the $2.4 Trillion ETF market. Browne and his team have helped create hundreds of funds through their advisory service to top providers like BlackRock, iShares, Schwab and Vanguard. Most who know him would agree that Browne has been a central figure in the ETF market’s steady global growth. The SEC is pledging greater commitment to retail investors this year. In turn, retail investors are continuing to drive the dramatic growth of ETFs and are comprising a significant chunk of daily volumes. There is no better person than Browne to help get the SEC and retail investors on the same page.
  • Kevin Cronin, Global Head of Trading, Invesco Ltd. – Perhaps one of the most outspoken and visible individuals representing the buy-side, Cronin is passionate on market structure issues and will bring a unique perspective to the committee.
  • Brad Katsuyama, President and CEO, IEX Group Inc. – The hero of Flash Boys, this sell-side trader turned entrepreneur and ATS operator brings perspective to the dark side of the equation. As IEX moves towards becoming a full-fledged exchange later this year, Katsuyama brings a Wall Street start-up mentality to the table.
  • Ted Kaufman, Professor, Duke University Law School and former U.S. Senator from Delaware – After years of Senate floor speeches and letter-writing campaigns, former Senator Kaufman finally gets a seat at the table and it’s an important one. Kaufman was one of the first in Congress to recognize the fallacies of Rules 605 and 606. His selection to the committee is surely intended to help improve disclosure rules and remedy conflicts of interest.
  • Richard Ketchum, Chairman and CEO, FINRA – Should any actionable items germinate within the committee, FINRA will no doubt do much of the heavy lifting with respect to rulemaking and surveillance.
  • Manisha Kimmel, Managing Director, Financial Information Forum – We were perhaps most surprised by Kimmel’s selection, at least at first. However, upon further consideration, Kimmel and the FIF organization will provide a gateway for feedback from members on tactical issues surrounding market data, metrics and audit trail mechanisms.
  • Mehmet Kinak, Vice President and Head of Global Equity Market Structure and Electronic Trading, T.Rowe Price Group – T.Rowe has appeared before Congress and the SEC on numerous occasions so this pick was of no surprise to us. Kinak’s participation will help to round out the buy-side perspective of the Committee.
  • Andrew Lo, Charles E. and Susan T. Harris Professor of Finance and Director, Laboratory for Financial Engineering, MIT Sloan School of Management and Chairman and Chief Investment Strategist, AlphaSimplex Group — Andy is an interesting pick, particularly if the SEC intends to better understand and apply quantitative analysis to finance and risk. Lo’s research spans a wide spectrum of subjects from Alzheimer’s Therapeutics to the origin of Risk Aversion.
  • Joseph Mecane, Managing Director, Barclays PLC – While Mecane is a former executive of NYSE and barely weeks into his new role with Barclays, one wonders if this selection was the SEC’s way of snubbing the Big Board.
  • Jamil Nazarali, Senior Managing Director & Head of Execution Services, Citadel Securities – Citadel executes a large segment of retail-based order flow, making Nazarali the Committee’s leading respresenative of internalizers and retail order sending firms.
  • Eric Noll, President & CEO, Convergex Group – Another snub? The SEC’s selection of this former Nasdaq executive appears to take a swipe at the exchange. Noll sat at the helm during the Facebook IPO fiasco. This makes his input valuable as the Committee works to prevent such occurrences in the future.
  • Maureen O’Hara, Robert W. Purcell Professor of Finance, Johnson Graduate School of Management, Cornell University and Chairman of the Board, Investment Technology Group Inc. – We predicted O’Hara’s inclusion on the Committee long before this month’s announcement so it was no surprise to see her name appear on the list. As one of the developers of order flow toxicity, VPIN, O’Hara will bring an academic point of view to the debate over market fragility and toxicity.
  • Joe Ratterman, CEO, BATS Global Markets Inc. – Unlike his counterparts at ICE and NASDAQ, Joe Ratterman is soft-spoken and operates with transparency. Ratterman represents the perspective of exchanges and brings a particular knowledge of current maker-taker pricing, which is sure to be an agenda item up for discussion this year. Ratterman often acts directly in his shareholders’ interests, so expect him to represent wholesalers and market makers through his work on the Committee.
  • Nancy Smith, Corporate Secretary & Chief Integration Officer, AARP – Smith is a former director of the Office of Investor Education and Assistance at the SEC. The AARP is an interesting choice to join the Committee’s buy side team and one with impressive political clout. Nancy can help the Committee wield more influence with Congress, which may well have been part of the SEC’s intent with this selection.
  • Chester Spatt, Kenneth B. and Pamela R. Dunn Professor of Finance, Tepper School of Business, Carnegie Mellon University and Director of its Center for Financial Markets – Spatt, the author of many highly-regarded papers on trading, serves as another of the Committee’s academic voices. Spatt co-authored “Equity Trading in the 21st Century” with James Angel and Larry Harris, noting the problems caused by maker-taker pricing. We view Spatt as the likeliest of the Committee’s members to advocate for M/T reform.
  • Gary Stone, Chief Strategy Officer, Bloomberg Tradebook LLC – Stone is an advocate for maker-taker reform and a critic of all forms of payment for order-flow. His selection to the Committee solidifies our view that the SEC is seeking to reform pricing structure. Stone’s knowledge of market structure, his experience in the industry, and his  balanced, well-supported views, bode well for the Committee.

So what do these assorted tea leaves tell us? In no particular order, these are the Committee objectives and rule-making initiatives that we see when we look into the future:

  • Maker-Taker reform
  • Rule 605/606 Modernization
  • Conflicts of Interest Resolution
  • Disclosure Refinement
  • Best Execution Standards

Of course, one thing we can’t augur is when action on any of these initiatives might actually take place. Knowing the SEC as we do, we’re at least willing to predict that it will be a while.