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Competition and Technology in the Securities Markets

As a follow up to her recent speech outlining her plan to address market structure issues, SEC Chair Mary Jo White addressed the importance of technology and competition in developing a regulatory approach to market structure issues.  She emphasized that any regulatory efforts in this area would not be pursued because the markets are broken, rather the SEC remains “focused on what in our market structure can be improved for the benefit of investors and companies.”

Chair White encouraged a broad approach – both in terms of time and markets – to studying potential changes to market structure.  For example, she noted that there have been assertions that the SEC’s adoption of Regulation NMS facilitated the increase of high frequency trading.  However, she noted that markets not impacted by Regulation NMS have also experienced increases in high frequency trading.  She used trading of the E-Mini S&P 500 futures contract on the Chicago Mercantile Exchange to illustrate her point, stating that high frequency traders account for more than 50% of the trading in E-Minis.  She stated “[c]omparisons like this rather basic one demonstrate the need for a wider lens in evaluating market structure issues and proposals for changes.  The wider lens immediately – and inevitably – brings competition and technology into view.”

Chair White also addressed intermediation in the markets, asking “whether intermediation has appropriately harnessed compensation and technology in the service of investors.”  She contrasted the differing effects of technology and competition in the equity and fixed income markets.  She noted that investors and issuers have benefited in significant ways from changes in competition and technology in the equity markets while acknowledging the challenges posed by market fragmentation.  In contrast, she expressed concern that technology has not transformed the fixed income markets in a similar way, noting that trading is still highly decentralized and investors have limited pricing information available before a trade.