Today, the U.S. Senate Permanent Subcommittee on Investigations is holding hearings on high-frequency trading, specifically in the Homeland Security and Government Affairs Subcommittee.
The most cogent testimony was provided by Vanguard Group's Joseph Brennan.
Mr. Brennan began by saying the markets are not "rigged."
"We have a high degree of confidence in the markets as a safe place for investors to place their assets for the long term," Brennan said.
He added that Individual investors have benefited from the market structure improvements that have been made over the last twenty years.
Brennan then made a bold claim: Our efforts should not be focused on banning high-frequency trading; instead, the most important goal should be to encourage market participants to publicly display limit orders. That would reduce spreads, increase liquidity, promote price discovery and lower transaction costs.
He does support a re-evaluation of Reg NMS, the cornerstone of the current market structure, particularly in three areas:
First: Maker/taker. Like Tom Farley, the NYSE President who also testified, Brennan supports efforts to revisit the current maker/taker pricing models.
Maker/taker was created to attract liquidity to public markets, but the proliferation of many different price points overtime has created "rebate arbitraging" which, Brennan says, " is really just trading focused on profiting from these rebates."
This creates the appearance of a potential conflict: Brokers may be tempted to send an order posting liquidity to the exchange with the highest rebate.
Brennan concludes: "The decision to submit orders to the public markets should not be driven by the desire to capture a rebate or avoid a fee."
Second: Trade-at rule. The current "trade through" rule prohibits the purchase or sale of a stock outside the national best bid and offer. This is one of the hallmarks of Reg NMS. But dark pools do not publicly display any bids or offers at all. They can execute orders without contributing to the price discovery process, Brennan says.
He supports a pilot program that would utilize a "trade-at" rule. The principal is that those that publicly display their interest (i.e. exchanges) should be first in line for any execution at that price across the markets. A "trade-at" rule would require dark pools to provide price improvement.
Third: Data feeds. With all thecontroversy over the consolidated market feeds (SIP) operated by the NASDAQ and NYSE, Brennan said he supported improving the integrity and resiliency of market-wide data feeds.