At a brokerage industry conference held last June, SEC Chair Mary Jo White gave clear orders. She said “we must evaluate all issues through the prism of the best interest of investors and the facilitation of capital formation for public companies. The secondary markets exist for investors and public companies, and their interests must be paramount.”
This news swept my peculiar corner of the capital markets like a spring Chinook, turning spirits verdant. For career I chose “investor relations” and now have logged 20 years in it. IR connects public companies with Wall Street. It seemed Chair White had finally added issuers to the team.
Last autumn, SEC Commissioner Kara Stein’s office asked me to join this Market Structure Advisory Committee, a group meant to help the SEC formulate inclusive policies. I was apprehensive of an invitation to Washington DC. But it seemed an unprecedented chance for public companies — Stein deserves kudos for effort — to at last participate in shaping market rules. I said I’d do it.
During intervening weeks, we heard of intense lobbying around the committee. We did something unnatural for me: We kept our mouths shut. On January 13, the SEC revealed the members and I was not among them. I felt some relief, to be honest. I supposed that CEOs of public companies with names weightier than ours had been added instead.
Then I read the list. The first person named was the co-CEO of a quantitative proprietary high-frequency trading outfit. The head of an exchange-traded funds (ETF) brokerage was there, as was a former NYSE executive now at Barclays, the firm sued by the New York attorney general over trading practices. Four professors made the cut, one an ex-Senator. People from Convergex, Citadel, Bloomberg Tradebook – all dark pools, or alternative-trading systems run by brokers rounded the list. We were happy to see our friend Brad Katsuyama from IEX on the list, too?
But no issuer perspective? I re-read Mary Jo White’s statement: “The secondary markets exist for investors and public companies.”
This is a fine way to show it, I thought. If public companies are the mortise to the tenon of investment capital, then this market advisory committee is upholstery without frame. The chief of the regulatory body overseeing our markets declares investors and issuers the essence of them and then bends to special interests and forms an advice committee constructed of 16 intermediaries and observers, two investors and no public companies.
It’s a microcosm of what needs changing. I don’t mean how politicians say one thing and do another. That’s a timeless aspect of human nature when those animated by it are in positions of power.
The problem is intermediation. From the proverbial square labeled “Go” on the anthropological Monopoly board, we have understood that if you want a good deal, cut out the middle man.
Yet everywhere middle men are running the show. The Market Structure Advisory Committee offering policy recommendations to the SEC – which is itself an intermediary – are intermediaries who neither invest nor go public but instead profit on both. How can that be a good deal?
Watching recent NFL playoffs culminating in a fourth Patriots Super Bowl victory, it’s apparent that the game has shifted from one of tempo and strategy to whether the replay says his elbow scuffed the three-inch line. Networks now pay somebody to explain the actions of referees. Over-intermediation.
Consider healthcare. The U.S. government has now become its intermediary. If the entity spending and losing – sometimes without a clue where it’s gone – more cash than any other on the planet is responsible for its dispensation, do you think you’re getting a good deal?
And how about the Federal Reserve? Free markets are supposed to reflect decisions of producers and consumers coalescing around supply and demand. But the Fed is intermediating jobs, prices, the supply of capital, the mortgage market, banking across the fruited plain, and risk and return on investments. The Fed bought $4 trillion of our own debt, backing it with full faith and credit, which by definition is “U.S. taxpayers.” Do you think you got a good deal?
The U.S. government is itself an intermediary created by the states. Now the political intermediary is in charge, spending our money on everything from Afghan politics to studying how monkeys gamble.
In the stock market, as in the country, the problem is too many intermediaries, which translates to a lack of good deals. I’m not sure what we do about the republic but in the stock market, Mary Jo White, it’s your Committee. How about cutting out some middle men and including some public companies?
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Bio: Tim Quast is President and founder of market-structure analytics firm Modern Networks IR, LLC in Denver.
