Release Date: June 27, 2017
Danko, 202-962-7390, firstname.lastname@example.org
Testimony at House Subcommittee Market Structure Hearing
Washington, DC, June
27, 2017 – Today, Jeff Brown, Senior Vice President of Legislative and Regulatory
Affairs at The Charles Schwab Corporation gave the following oral statement before the House Financial Services Subcommittee on Capital Markets,
Securities and Investments at a hearing entitled “U.S. Equity Market Structure Part I: A Review of the
Evolution of Today’s Equity Market Structure and How We Got Here,” with the
testimony submitted for the record:
Chairman Huizenga, Ranking Member
Maloney and distinguished Members of the Subcommittee, my name is Jeff Brown,
and I am senior vice president and head of the Office of Legislative and
Regulatory Affairs for the Charles Schwab Corporation. It is my honor to appear before the subcommittee
today on behalf of the Securities Industry and Financial Markets Association,
better known as SIFMA. SIFMA represents
a broad range of financial services firms – including Schwab – that are active
in our capital markets.
Congress first mandated the establishment of a National Market
System in 1975. At that time, most
equity trading took place manually, on the trading floor of an exchange. Today’s market is fully electronic and
automated with a vibrant ecosystem of competing market venues, including more
than a dozen exchanges and more than 40 Alternative Trading Systems.
Although advances in technology had a major role to play in the
evolution of our markets, there have been three major regulatory developments
since 1975 that have created the capital markets of today.
First, in 1998, the SEC adopted Regulation ATS, which established
regulatory standards for Alternative Trading Systems. The net result of Regulation ATS has been the
growth of trading venues that offer varying business models and compete for
order flow to the benefit of investors of all types.
Second, in 2001, decimal pricing began, after nearly 200 years of
a system in which equities traded in fractions.
Trading in pennies revolutionized our markets, spurring the rapid growth
of electronic trading and increasing liquidity.
Finally, in 2005, the SEC adopted Regulation NMS, which was
predicated on the need to foster more efficient markets by promoting fair
competition, while at the same time assuring that the markets were linked
together to encourage the interaction of – and competition between – the orders
of buyers and sellers.
The centerpiece of Regulation NMS is Rule 611, the Order
Protection Rule. Simply stated, the rule
was designed to ensure that displayed investor orders cannot be ignored, or,
Together, these changes, both regulatory and technological, have
created markets that are unrecognizable from the markets of 10 and 20 years
ago. The markets today are highly
automated and efficient, providing near-instantaneous, low-cost executions. Retail investors, Schwab’s clients, in
particular have benefitted from an incredibly competitive and dynamic
There is one other historical shift that has played an important
role in the development of today’s market.
In the early and mid-2000s, the national securities exchanges began to
become for-profit companies instead of broker/dealer-owned utilities. Today, the largest exchanges are owned by
publicly-traded corporations. As such,
they now have a fiduciary duty to deliver profits to their corporate
shareholders. This has radically changed
the incentives that exist in our capital markets and created conflicts of
interest that remain unaddressed.
While we understand and appreciate that the Committee intends to
evaluate policy options at a later date, we would like to highlight two
critically-important areas where we believe policymakers need to address issues
that have created significant inefficiencies.
First, we believe that the entire concept of Self-Regulatory
Organizations, or SROs, and National Market System Plans, which are controlled
by them, need to be rethought. SIFMA
believes that strong self-regulation must continue to be an integral part of
the oversight of the market and its participants. Exchanges, however, continue to act as SROs,
even though they have become competitors with their former owners. In other words, for-profit companies act as
regulators of the very market participants with which they directly compete. SROs also manipulate NMS Plans to advance
their commercial interests at the expense of the industry and the investors
they serve. These conflicts of interest
are obvious, and we believe Congress or the SEC needs to move quickly to
rethink the role and responsibilities of a self-regulatory organization in
light of this new reality.
Second, we believe the market data system – the way investors
receive the bids, offers, last sales and other critical information that is the
lifeblood of an effective market – remains locked in a 1970s structure and is
in serious need of an overhaul. Today,
the exchanges offer their own market data streams faster and with far better
and deeper information, but at sharply escalating fees. The consolidated data stream, which the
industry must purchase by rule, is slower and contains only ephemeral
top-of-book quotes. This structure has
returned us to an era when privileged pros get access to better, more timely
market information than ordinary investors.
This outcome is absolutely contrary to all that has occurred over the last
two decades of regulatory and technological development. We urge the SEC or Congress to address this
glaring issue as soon as possible.
Thank you again for the opportunity to testify today, and I look
forward to answering your questions.
SIFMA is the voice of the U.S.
securities industry. We represent the broker-dealers, banks and asset managers
whose nearly 1 million employees provide access to the capital markets, raising
over $2.5 trillion for businesses and municipalities in the U.S., serving
clients with over $18.5 trillion in assets and managing more than $67 trillion
in assets for individual and institutional clients including mutual funds and
retirement plans. SIFMA, with offices in New York and Washington, D.C., is the
U.S. regional member of the Global Financial Markets Association (GFMA). For
more information, visit http://www.sifma.org.