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Investor Viewpoint: Focus on Practices and Market Structure


It’s a fair question: How are investors faring under the current structure of the U.S. securities markets? That question focuses on whether investors benefited more from the “old style” of trading, where an investor’s call to a broker to trade securities was the norm, or from the “new style” of trading, characterized by “low touch,” high-speed executions. The debate is posed as “man vs. machine.”

At the Investment Company Institute, which represents the mutual fund industry, we believe man and machine can coexist.

Mutual funds’ sole interest in the debate is to ensure that America’s markets operate efficiently, transparently, and fairly for the benefit of all market participants—including funds and the 90 million American shareholders they serve.

Undoubtedly, investors are better off overall today than they were just a few years ago. Advances in technology have slashed trading costs, made new trading tools available to investors, and increased the overall efficiency of markets.

But technology has not solved many of the long-time challenges that markets pose for institutional investors like funds, including the ability to trade large blocks of stock in the most efficient manner possible. And advances in technology have created new challenges: fragmented markets, for example, that have resulted in less displayed liquidity and a smaller average execution size.

Focus on Practices and Market Structure

It is critical that regulators address these challenges and examine whether the rules governing the markets have kept pace with the significant changes in technology and trading practices. This examination should be broad and should focus on a wide variety of practices that could potentially harm investors, such as widespread order cancellations, “quote stuffing,” and the practice of providing liquidity rebates and other incentives to route orders to particular venues.

Inevitably, an examination of these practices will raise the debate over “high-frequency trading.”

High-frequency trading has become a catchphrase that covers a wide range of activities and practices—most of them legitimate—and that too often obscures the debate rather than clarifying it. High frequency trading arguably brings several benefits to the securities markets in general and to investors, providing liquidity and tightening spreads.

But regulators do need to concentrate on practices by market participants—including high-frequency traders—that are abusive, including strategies designed to detect the trading of large blocks of securities by mutual funds so that traders can front-run those blocks.

All trading venues and market participants, no matter how technologically savvy, should compete on the basis of innovation, differentiation of services, and the value their model of trading presents to investors. The securities markets and the regulations that govern those markets must operate in the interests of investors. “Man vs. machine” can morph into “man and machine” when regulators have the information they need and modern regulations in place to reflect our modern markets, ensuring an efficient, fair and transparent market structure for all participants.

Paul Schott Stevens has served as President and Chief Executive Officer of the Institute since June 2004. He also is a director of ICI Mutual Insurance Co. From 1993 to 1997, he was ICI's General Counsel. Outside ICI, Stevens's career has included varied roles in private law practice, as corporate counsel, and in government service. Between 1985 and 1989, Stevens served as Special Assistant for National Security Affairs to President Reagan, as Executive Secretary and Legal Adviser of the National Security Council, and in other senior positions at the White House and the Pentagon. A Scholar of the House at Yale University, Stevens received his B.A., magna cum laude; he received a J.D. from the University of Virginia.