January 21, 2015

The Committee

I’ve learned lots about politics the last couple weeks.

In June 2014, SEC Chair Mary Jo White 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.”

You remember that?  We wrote here about it, thinking perhaps for once a regulator wasn’t gazing over the heads of all the public companies in the room.

Last autumn, SEC Commissioner Kara Stein’s office asked me to join Chair White’s proposed Market Structure Advisory Committee, a group meant to help the SEC formulate inclusive policies. Energized by SEC rhetoric, I said I’d do it.

As time passed, we had wind through relationships in the capital markets of intense lobbying around the committee. We decided we’d do something contrary to my nature:  Keep our mouths shut.

On January 13 this year, the SEC revealed the members and I was not among them. I felt some relief, supposing 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 Exchange-Traded Funds (ETF) for a broker 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. Heck, the corporate secretary for AARP somehow got on a market-structure committee. Really.

We were refreshed by Brad Katsuyama’s inclusion, as the CEO of IEX is a genuine hammer flying through the Orwellian screen of convention.

But no issuer perspective? Not a single voice of any sort from our camp?

I re-read Mary Jo White’s statement: “The secondary markets exist for investors and public companies, and their interests must be paramount.”

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 sixteen 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 the humans animated by it are in positions of power.

No, the problem is intermediation. Back to the proverbial square labeled Go on the great anthropological Monopoly board, we have understood as a sentient race that if you want a good deal, cut out the middle man.

Look around and you’ll see that intermediation is pandemic. Watching recent NFL playoffs culminating in a Seahawks-Patriots Super Bowl, it’s apparent the game has shifted from one of tempo and strategy to whether the replay says he was down because his elbow scuffed the three-inch line. The network sports commentators now are paying somebody to explain the actions of referees. Over-intermediation.

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 implied risk and return in investments. Its balance sheet has bloated on $4 trillion of debt nobody else would buy, which is backed by the full faith and credit of the United States, which by definition is “U.S. taxpayers.”  Do you think you got a good deal?

In the stock market, as in the country, the problem is too many intermediaries. And the SEC chair presiding over markets where she says investors and public companies are paramount will now get her policy advice mostly from middle men.

I don’t think public companies should expect a good deal. Anybody up for a revolution of some sort?  (A little humor, there…I’ll now await my IRS audit notice in the mail.)

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