TABB Group currently is interviewing the US hedge fund community for our annual equity trading study, and the question was posed to participants: “What issues should the regulators focus on this year?” Nearly all the respondents noted that regulators were not well versed enough on the nuances of trading to be able to make any informed decisions. One manager even complained that regulators have no people in-house with any real trading experience, so how could they know what rules to implement?
Now, it is not that the regulators have not been trying to understand market structure. The SEC has held a number of roundtables at which market participants were given the opportunity to explain definitions, defend market practices and point out requirements that they believe make the markets unfair. Everything from dark pools to high-frequency trading has been discussed. But hedge fund managers interviewed by TABB aren’t convinced roundtables are the answer.
Another hedge fund manager pointed out that everyone sitting at an SEC roundtable has their own agenda, making it difficult for the SEC to come away with the ability to make any real, unbiased decisions. Managers are also skeptical of political agendas and fear regulators may be influenced unfairly by larger market participants.
[Related: “Buy-Side Market Structure Experts: Where Are You?”]
The SEC's increasing focus on learning the details of algorithmic trading, for instance, will only help the Commission make better decisions on market structure policy. But listening to market participants read speeches on why certain order types and venues should or should not exist is one thing; actually understanding the details about the strategies being used is another. The SEC is attempting to not only understand what high-frequency trading is, but also the tools and technology being used by high-frequency traders and how they could be used to manipulate the market. This is a different and very important initiative.
The regulators have always been looked at as outsiders with zero market knowledge. There has always been a lack of respect for them in the industry because participants felt as though Grandpa SEC was not hip to the way today’s markets operate. That could all change if the SEC is able to move past Trading 101 to understanding the nitty-gritty of trading or, at least, if it works with and hires folks who do understand the markets. A more knowledgeable regulator may be a driving force to stop those who engage in unethical activity that they know regulators may not yet comprehend.
Let’s see who else joins the bandwagon -- the CIA, perhaps? Maybe not. But between the SEC and the FBI, let’s hope they are able to get up to speed quickly.