Today [November 19, 2014], the Commission considers adopting Regulation Systems, Compliance, and Integrity (or Regulation SCI). These rules and amendments are intended to establish a foundational regulatory framework for the technological market infrastructure that has become increasingly intertwined with the functioning of our securities markets. The rules being considered for adoption today represent a clear improvement over the proposed version, which offered only a hollow promise that our markets would be safer, more resilient, and more stable.
Posts Tagged ‘Capital markets’
On September 19, 2014, the Financial Industry Regulatory Authority (“FINRA”) announced that its Board of Governors (the “Board”) approved a series of regulatory initiatives primarily focused on equity and fixed income market structure issues. This is a direct response by FINRA to two important speeches this summer by SEC Chair Mary Jo White, in which she articulated an ambitious agenda of market structure reforms. 
The Board authorized FINRA staff to prepare Regulatory Notices soliciting comments or issuing guidance on the following:
As controversial as is HFT, the large volume of the discussion sometimes makes it hard to understand the content. What elements of HFT positively impact the trading markets? Which are problematic? What are the proposed mitigations? Therefore, the Investor Responsibility Research Center Institute (IRRC Institute) asked Khashanah, Florescu, and Yang (KF&Y) to look at HFT from various perspectives. The result includes:
- The effect of HFT on volume, price efficiency and liquidity.
- The problems and risks seen by various stakeholders from their vantage points.
Mary Jo White, the Chair of the Securities and Exchange Commission (the “SEC”), recently delivered two speeches with important implications for the future structure of U.S. equity markets. The first (discussed on the Forum here), delivered on June 5, 2014, discussed various initiatives to improve equity market structure. The second (discussed on the Forum here), delivered on June 20, 2014, addressed the importance of intermediation in the securities markets and the roles that technology and competition play with respect to various types of market intermediaries such as exchanges, dark pools, brokers and dealers. In both speeches, Chair White expressed her belief that the equity markets are not rigged or fundamentally unfair, but nevertheless could—with updated or different regulations—function more efficiently and with even greater fairness than they currently do.
Today [June 20, 2014], I want to speak to you about the current state of our securities markets—an issue that I know is on your minds and one that is well-suited for the financial capital of the world.
The U.S. securities markets are the largest and most robust in the world, and they are fundamental to the global economy. They transform the savings of investors into capital for thousands of companies, add to nest eggs, send our children to college, turn American ingenuity into tomorrow’s innovation, finance critical public infrastructure, and help transfer unwanted financial risks.
The state and quality of our equity markets in particular have received a great deal of attention lately, with a discussion that has expanded well beyond those who regularly think and write about these markets to include every day investors concerned about the investments they make and the savings they depend on. I have been closely focused on these issues since I joined the SEC about a year ago, and I welcome this broader dialogue.
It is great to be here with you in New York to speak about our equity market structure and how we can enhance it.
While I know your views on particular issues may differ, you all certainly appreciate that investors and public companies benefit greatly from robust and resilient equity markets.
During my first year as Chair, not surprisingly, I have heard a wide range of perspectives on equity market structure, reflecting its inherent complexity, the relationships among many core issues, as well as the different business models of market participants. To frame the SEC’s review of these issues, I set out last fall certain fundamentals for addressing market structure policy. One of those is the importance of data and empirically based decision-making. At that time, we launched an interactive public website devoted to market structure data and analysis drawn from a range of sources. The website has grown to include work by SEC staff on important market structure topics, including the nature of trading in dark venues, market fragmentation, and high-frequency trading.
I am honored to be here today [February 21, 2014]. This is the sixth time that I have spoken at “SEC Speaks” as a Commissioner. Much has changed since my first “SEC Speaks” in February 2009. At that time, we were in the midst of the worst financial crisis since the Great Depression. Among other things, Lehman Brothers had recently filed for Chapter 11 bankruptcy, The Reserve Primary Money Market Fund had “broken the buck,” and the U.S. Government had just bailed out insurance giant AIG. In addition, the Bernard Madoff Ponzi scheme had come to light just a few months earlier, further shaking investor confidence in the capital markets.
These and other events made it clear that the SEC had much to do to become a more effective regulator and to enhance its protection of investors. It was also clear that the agency itself had to undergo significant change. As a result, in my 2009 remarks at “SEC Speaks,” I highlighted a number of steps that Congress and the SEC should take to close regulatory loopholes. These regulatory gaps included a lack of appropriate regulation in the areas of over-the-counter derivatives, hedge funds, and municipal securities—areas that Congress subsequently addressed in the Dodd-Frank Act.
In prior articles (see, e.g., Regulating Shadows: Financial Regulation and Responsibility Failure, 70 Wash. & Lee L. Rev. 1781 (2013)), I have argued that shadow banking is so radically transforming finance that regulatory scholars need to rethink certain of their basic assumptions. In a forthcoming new article, The Governance Structure of Shadow Banking: Rethinking Assumptions About Limited Liability, I argue that the governance structure of shadow banking should be redesigned to make certain investors financially responsible, by reason of their ownership interests, for their firm’s liabilities beyond the capital they have invested. This argument challenges the longstanding assumption of the optimality of limited liability.
As market professionals, you obviously live the U.S. equity markets first hand, day in and day out. As an association, you have used your voice to focus attention on the value of our equity markets—an all-important engine for capital formation, job creation, and economic growth.
Like you, I believe that we must constantly strive to ensure that the U.S. equity markets continue to serve the interests of all investors. That mutual challenge must come fully of age and address today’s, not yesterday’s, markets. And today, I will speak about the path forward.
An issue of considerable interest to accounting researchers is the association between shareholders and firms’ financial reporting quality (FRQ). In our paper, Blockholder Heterogeneity and Financial Reporting Quality, which was recently made publicly available on SSRN, we examine a specific type of shareholder, blockholders, because (1) they offer a sample of shareholders that are expected to have a significant impact on firms’ financial reporting decisions and (2) we are able to track individual blockholders and their association with FRQ. As discussed in more detail below, these two sample design features allow us to provide a test of the extent to which (large) shareholders influence FRQ. Blockholders also provide an interesting and economically important sample because of their large presence in U.S. capital markets in recent years.