A blue-ribbon panel is proposing a bevy of reforms that it hopes will restore confidence in the stock market.
Responding to charges of a "rigged" market and propelled by some highly publicized malfunctions, the Committee on Capital Markets Regulation released a laundry list Thursday of changes it believes will make the market function better.
"Flash Boys" author Michael Lewis famously made the "rigged" accusation following the 2014 publication of his book that detailed the crusade of upstart exchange IEX to counter high-frequency trading strategies. HFTs use computers to trade in milliseconds. They've often been faulted for market problems, with the book detailing the measures HFTs go through to gain advantages over competitors.
The committee said it does not believe Lewis' claim is accurate, but acknowledged the market is in need of some basic structural reforms.
"Although our markets are not rigged, there is clearly room for improvement," Hal Scott, a renowned Harvard professor who chaired the committee, wrote in an essay that accompanied the 180-page report. "And our blueprint provides the SEC with the direction that it needs to unleash the benefits of a resilient, transparent and competitive stock market."
The panel consisted of executives across Wall Street. Members include hedge fund titan Ken Griffin at Citadel, Kenneth Bentsen Jr., who heads the Securities Industry and Financial Markets Association, and multiple representatives of trading firms and Wall Street investment banks.
Recommendations were designed to address three broad issues: increasing transparency so investors have a clearer idea of what's happening in the market with regard to pricing; "strengthening resiliency" so that damage from episodes like the March 2010 "Flash Crash" and the Aug. 24, 2015 event where half the S&P 500 stocks didn't open on time is minimized; and reducing transactions costs.
Among the proposals: Increased disclosure on trading activities, quicker triggering of "circuit breakers" that halt trading during unusual activity, and a top-to-bottom review of fees and pricing.
One recommendation in particular, that exchanges be forced to reduce the fees they charge brokers, would save investors $850 million a year, the report said.
Scott specifically said the changes were inspired by "Flash Boys" and follow some recommendations made by IEX.
However, he also said some of the concerns about the market are misplaced.
For instance, Scott said strategies employed by high-frequency traders, such as trying to capitalize on discrepancies in price spreads for individual stocks, "are just modern versions of traditional market making and arbitrage strategies that have always existed and provide important benefits to investors."
The report also said that "dark pools," or trading venues operated away from public exchanges, actually help save investors money through better pricing.
"We find that even during times of crisis there is limited empirical evidence that HFT strategies contribute to price declines, with the majority of studies finding that HFT strategies help stabilize prices during a market crash," the report said.
The authors said most of the recommended changes can be implemented by the Securities and Exchange Commission, though a few will require legislative action.