Capital Group, one of the world’s biggest investment groups and a cornerstone backer of upstart stock exchange IEX, wants the incoming Trump administration to stymie high-frequency traders by overhauling one of the US equity market’s biggest but controversial regulatory planks.
Matt Lyons, global head of trading at $1.4tn Capital Group, was a big supporter of the anti-HFT exchange made famous by Michael Lewis’s book Flash Boys, making his firm its first investor and championing IEX’s business model to regulators, which last year gave it full exchange status.
But with the advent of a new government in Washington and fresh leadership of the Securities and Exchange Commission, Mr Lyons is eyeing an even more radical overhaul of the US equity market: changing parts of Regulation National Market System, or RegNMS, which critics say have led to conflicts of interest and dangerous complexity.
“I am hopeful,” he said. “I’ve been pleasantly surprised that over the past few years we finally have the ears of regulators. And I think that with a pro-growth and less regulatory attitude we could actually get something done.”
RegNMS was introduced by the SEC in 2007 to enhance the efficiency of US equity markets by encouraging competition between individual exchanges, and requiring all orders to be routed to all bourses to ensure the best possible prices.
This has woven individual US exchanges together into one highly liquid, electronic marketplace, with $7.3tn of orders whizzing around every day on average last year.
But to attract trading activity in this more competitive environment, exchanges have in recent years started offering various rebates for firms that “take” or “make” liquidity, in other words offer to post orders on their bourses or to fill them. Critics say these maker-taker rebates have proven catnip to hyperfast trading firms that machinegun orders at exchanges and have led to unnecessary and harmful complexity.
While Mr Lyons said the US stock market’s electronic evolution on the whole has been positive, bringing down costs to investors like Capital Group, he argued that there is still room for improvement, especially “low-hanging fruits” like scrapping the maker-taker model.
“We have now seen RegNMS operating for almost 10 years and we have a lot of data and understanding of the impact. I certainly think that some unintended consequences have come about, and changes to that could be a benefit to the market,” he said.
Mr Lyons concedes that getting rid of the rebating structure might initially hurt liquidity, but overall improve the market’s health by reducing some of its immense complexity.
IEX was envisaged as a partial counter to increasing complexity, introducing a flat fee on all shares traded with no rebates and a “speed bump” aimed at holding HFTs at bay. However, in spite of its new exchange status, its share of the US equity market has remained steady at 2 per cent, in part because its fees are more expensive than those of rivals.
There is industry chatter that under new management the SEC could revisit RegNMS more broadly — or even scrap it altogether.
The Trump administration has nominated Jay Clayton, a capital markets lawyer at Sullivan & Cromwell, to chair the SEC. His views on the stock market’s structure and RegNMS in particular are not known, but Paul Atkins, a former SEC commissioner who is advising Mr Trump on regulatory matters, voted against RegNMS in 2005, warning that the reforms would spawn complexity and market distortions.
