When US President Barack Obama appointed Mary Jo White to head the Securities and Exchange Commission he warned everyone that “you don’t mess with Mary Jo”.
While many may have dismissed it as a throwaway line aimed at bolstering his choice to replace Elisse Walter as chairman in April last year, the 66-year-old attorney is starting to live up to her reputation.
Last week, White gave her strongest indication yet that she won’t back away from a fight by pledging to shine a bright light on so-called ‘dark pools’, or off-market exchanges that don't post investors' buy and sell orders and only report trades to the public after they take place.
White indicated she did not buy the line being pushed by best-selling author Michael Lewis in his book Flash Boys that markets are being rigged in favour of high-frequency trading. For readers who aren’t one of the 130,000 people who pushed Lewis’ book to the top of the New York Times bestseller list in its first week alone, high-frequency trading is the process whereby super-fast computers and complex algorithms allow traders to buy shares for premium clients quicker than what is available to the general public.
White did emphasise however a point that this columnist has been banging on about for a while: regardless of the reality, the public needs to have confidence that these off-market exchanges are being run fairly and transparently.
“Equity markets are, of course, now dominated by computer algorithms, which generate orders at a volume and speed that have transformed the nature of trading,” she said. “The equity markets are strong and generally continue to serve well the interests of both retail and institutional investors. The largely positive data on broad market quality does not mean, however, that the current market structure is without issues.
“As we move forward in the next phase of our efforts to enhance our market structure, I am recommending additional measures to further promote market stability and fairness, enhance market transparency and disclosures, and build more effective markets,” she said.
One of the key planks of White’s proposal is a rule that would require high-frequency traders to register with regulators as broker dealers, thereby submitting them to greater scrutiny. White also proposed a trading rule that would prevent rapid-fire traders from engaging in short-term strategies to bolster their profits at the risk of increased market volatility.
However, while White has raised the gloves she needs to ensure she follows through.
Let’s not forget that similar issues were making headlines back in 2000 when Arthur Levitt was SEC chairman. He proposed monitoring how brokers submitted orders because he felt that they had little incentive to find the best price for customers. However, simply monitoring the situation clearly didn’t work because just five years later the SEC was forced to implement ‘The Consolidation Rules’. These rules, which later became known as ‘Reg NMS’, required exchanges to reroute an order if a better price existed elsewhere.
Yet in 2014 the US still finds itself in a situation where those who can pay or have access to super-fast computers have an unfair advantage over those general traders who do not.
White’s proposals still need to be voted on by the entire SEC, which frankly means it could be months or even years until they are fully implemented.
Hopefully when the US Senate's Permanent Subcommittee on Investigations starts hearings next week looking at potential conflicts of interest between trading venues and customers it will provide an imperative for swift action.
It is up to White now to ensure that her own proposals don’t languish on the shelf and that she delivers the reform that is needed -- particularly given Michael Lewis has already sold the rights for Flash Boys to Columbia Pictures, which will no doubt bring the story to a broader audience sooner rather than later (if the success of his other two adaptations -- Moneyball and The Blind Side -- are any indication).
White has to deliver that one-two punch that convinced Obama to appoint her to the SEC chair in the first place. Otherwise she is going to find herself on the mat.
Mathew Murphy is a Walkley Award winning journalist based in New York.