July 9, 2014

The Empty Chair

There’s the old joke about camels. They’re horses designed by a committee.

Speaking of committees, for the second time in a month, that august federal legislative chamber the US Senate yesterday convened a hearing on markets. Replacing the Senate Permanent Subcomittee on Investigations was the Senate Banking, Housing and Urban Affairs (none of these items appear in the Constitution under delegated congressional responsibilities, I observe) Committee calling a confab of big hitters from markets to explain why Michael Lewis has the bestselling investing tome in the USA (Flash Boys).

One weighty weigher-in was ICE CEO Jeffrey Sprecher, who testified: “The costs associated with maintaining access to each venue, retaining technologists and regulatory staff, and developing increasingly sophisticated risk controls are passed on to investors and result in unnecessary systemic risk.”

Quoted in a story by Bloomberg’s Sam Mamudi, another congregant before Congress, Dave Lauer of KOR Group LLC, said, “Regulation has created this monstrosity of a market, and it is only by peeling back some regulations and refining others that we can hope to simplify market structure and increase market efficiency.”

I must note: we’ve decried similarly for about the past seven years, before it was cool to do so and the subject of a New York Times bestseller.

Not everybody wants to rend the fabric. Said CEO Joe Ratterman of BATS Global Markets: “Whether it is banning the current maker-taker fee structure, limiting payment for order flow generally, or other attempts to alter the fundamental economics of trading, price controls are a blunt instrument likely to cause disruptions and consequences that are unforeseeable and potentially detrimental to all types of investors.”

There were witnesses from the Nasdaq, Invesco, Georgetown University and Citadel Derivatives. The empty chair? Somebody representing public companies. Not a one. We might as well hold hearings on beef prices and leave out cattle ranchers.

Here’s the golden opportunity for investor relations. In order for your executives to sit comfortably before Congress and explain what’s missing in form and function from markets for issuers, IROs have to first understand market structure. Cattle ranchers would know the supply chain, the issues impacting beef-production from regulation to disease to external competition.

To issuers, oftentimes the equity market looks like a horse designed by a committee. And that’s correct. It was in fact designed by a committee called the Securities and Exchange Commission, which took marching orders from Congress (look it up!), itself a committee, in 1975 – 1975 for crying out loud! – to create a national market system.

Now, 39 years later, Congress is holding hearings to figure out why that horse they thought was a market looks like a camel. Could I offer any more compelling reason for public companies to become well-versed in market structure? Consider it part of your job description now.

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