Earlier this week, the Senate Committee on Banking, Housing and Urban Affairs listened to testimony from experts concerning market structure. Among the topics were high frequency trading, dark pools, Reg NMS and Michael Lewis “Flash Boys.” One of the experts who testified wasJames Angel, associate professor of finance at Georgetown Universitys McDonough School of Business. He has served as a visiting economist for the Shanghai Stock Exchange and was chairman of the Nasdaq Economic Advisory Board and as a member of the OTC Bulletin Board Advisory Committee. Traders asked him for his thoughts on what questions the committee asked and what new legislation we might see.
His full remarks to the committee can be found the Senate Banking website.
Traders: How did testifying before the Senate committee go?
James Angel: I thought it went well I didnt have to take the Fifth Amendment at all.
Traders: Does the committee have a grasp of the issue? Do they know the consequences of Reg NMS and todays markets?
Angel: It varies. Its a very big committe and you have a number of senators who seem to know what is going on. The one guy from California was a former floor trader so I got the sense he knew this iss.
I think the issue on how many days Virtu made money misses the point (as one senator pinted out). Because their operation is very different from your typical gun slinger. You could also how many days McDonalds loses money? How many days does the NYSE lose money? There are plenty of businesses that essentially make money everyday.
Traders: What was the theme of the questioning? Were they asking about recommendations for reform?
Angel: Well, one thing I noticed was they did not make us swear to tell the truth when we began testifying. I didn’t get the impression that this was public shaming of someone in business. There are a number of different type of hearings. Some are designed to showcase the people on the committee and to show that they are doing stuff. They are playing for their constituents.
I did not get that sense with this one. I got the sense that they are really trying to ask the right questions, and the senators would have to be totally blind if they didnt see the furor caused by Flash Boys. One of the senators waved the book around and its natural for them in that situation to ask, Whats going on here, guys. Tell us! I got the sense that they were honestly trying to learn more about the situation.
Traders: Are you expecting any reforms in the next years?
Angel: I am not expecting anything in the next few months from Congress because they are deadlocked, and they know they are deadlocked.
What I was pushing for in my written remarks was, We have a problem here. We have to start the process of structural reform, which is painful. Its going to be long, its going to be tedious, its going to be contentious. It took 10 years to get Glass-Steagall reform through and it will probably take a decade to get meaningful structural reform through. But, it should be a slow and deliberative process but it will never happen if you don’t begin.
They need to say, Okay if the regulatory structure worked, we in the Congress would not have to deal with this stuff, to have somebody tell Congress about the Kill Switch design and how it should be the same across different platforms – that is a level of detail… The senate should not have to deal with that level of detail. If our regulatory system worked, they wouldnt have to. If we build a consensus together it would work. Of course different people would have different solutions,. I would suspect that Sen. Warren would say, lets give all consumer protection to her new Consumer Financial Protection Bureau. Once the bureau proves itself, they could a better job than the SEC but that could be further down the road after people know what to expect out of CFPB after they fix the structural problems.
Clearly, the problem that people have to wake up to the fact is they are not prepared for the next major disruption. There is always going to be another one built for the political people involved, they happen fairly infrequently and so there is a rill of the dice and a hope that it doesnt happen on their watch.
Traders: Were the senators gunning for HFTs or dark pools?
Angel: One senator asked if we should ban HFT and everyone said no. Theyre hearing all this negative criticism about HFT and dark pools – they know that they really don’t understand it. So I think they are trying to learn more about it but I didn’t get the sense that they were gunning for one particular thing. There is no legislation that they are about mark up on this.
Then again, who knows? Maybe Sen. Warren will want to come out with a law that says, Lets force every trader to hold onto their stock for a month kind if bill. I was being facetious there.
