The Consumer Federation of America, a non-profit consumer advocacy group, recently issued a white paper entitled Toward A U.S. Equity Market Structure That Serves All Investors. The paper argues that the current state of the market is “unnecessarily complex, fragmented, lacking basic transparency mechanisms, and ridden with conflicts of interest; and, the technological arms race has led to trading activities that disadvantage long-term investors, expose the financial system to excessive risks, and shake investor confidence.”
The group urges the SEC to implement a “trade-at” rule to drive trading back to exchanges and away from dark pools. The SEC’s recent proposal for a tick size pilot program included a “trade-at” testing group which would give execution priority to displayed quotes. The CFA argues that the current market is opaque and a “trade-at” requirement is a “critical component of a transparent, competitive, and efficient market.”
Next, the group argues that maker-taker pricing and payment for order flow distort market structure and reduce market quality. To redress this issue, the paper advocates for the elimination (or at least a study on the effects of eliminating) maker-taker, and a requirement that payment for order flow result in significant price improvement for retail customers.
Exchanges benefit from ensuring that market data is distributed at different speeds, thereby making faster data feeds more valuable and more profitable, according to the paper. The group notes that the same exchanges that profit from selling data feeds serve as members of the group that operates the consolidated data feed. This unequal access undermines market integrity and tangibly harms market participants that receive data at slower speeds, according to the CFA. The group proposes amending Reg. NMS to provide that “a direct, proprietary feed cannot be received by any market participant before the consolidated feed is published,” and changing the governance of the Consolidated Tape Association to address inherent conflicts of interest.
While acknowledging certain benefits that high-frequency traders bring to markets, the paper argues that these traders should be subject to market-maker requirements because of their status as “de-facto liquidity providers.” This would resolve issues noted by the group, such as the fact that high-frequency traders are often the consumers of the faster data feeds, which allows them to trade in “ways that are unproductive and harmful to investors and to the market.” In the current state, such traders use practices that the group argues are “intentionally predatory and manipulative,” making them the largest factor in the appearance of unfair markets.