Statement Summary
In a presentation at the 12th Annual Conference on Financial Market Regulation, SEC Commissioner Hester Peirce emphasized the importance of economic research in developing effective market regulation. She criticized recent SEC initiatives that prioritize regulatory intervention over natural market dynamics, illustrating this with a historical anecdote from Ulysses S. Grant. Peirce explored the complexities of market structure, arguing that excessive regulation could homogenize exchanges and inhibit innovation. She urged economists to assist in analyzing the impacts of regulations like the Order Protection Rule and the role of Alternative Trading Systems (ATSs). While acknowledging the effectiveness of U.S. markets, Peirce called for a careful reassessment of the current regulatory framework to foster true competition and adapt to evolving market needs.
Original Statement
Thank you for having me here today as part of the 12th Annual Conference on Financial Market Regulation. Before I begin, I must remind you that my views are my own as a Commissioner and not necessarily those of the SEC or my fellow Commissioners. I appreciate the collaboration of the SEC’s Division of Economic and Risk Analysis, Lehigh University’s Center for Financial Services, and the University of Virginia’s Darden School of Business in hosting this conference.
The Commission benefits from economic research on financial regulation. Given that the SEC is a market regulator, I am disappointed when deprecation of economic fundamentals slips into the Commission’s work. An incident recounted by Ulysses S. Grant in his memoirs reminded me of a quibble I had with the justification for a recent Commission rulemaking. When Grant was about eight years old, his father dispatched him to buy a horse: impressive, even if his negotiating skills proved not to be. Grant’s father thought the horse worth only twenty dollars, but told the young Grant—who desperately wanted the animal—that he should start by offering twenty dollars and could work his way up to twenty-five. The future Union general and U.S. president implemented his father’s instructions as follows: “Papa says I may offer you twenty dollars for the colt, but if you won’t take that, I am to offer twenty-two and a half, and if you won’t take that, to give you twenty-five.” He paid twenty-five.
The incident in which he informed his counterparty to his own detriment was long a source of embarrassment for Grant, but how much more embarrassing it is for a market regulator to suggest that fully informed traders are a prerequisite for fair markets. The Commission took that position in its recent rulemaking to shorten beneficial ownership reporting timelines; it justified faster mandatory reporting of position build-ups on the theory that buyers who voluntarily sell at a price that has not incorporated all available information suffer harm by not having information that other investors have. As I said at the time, the SEC was “inventing investor harm”. We want to encourage investors to ferret out information and find undervalued companies. Indeed, information asymmetries in this sense—where investors have equal access to disclosure from the issuer and insiders, but come to different conclusions about the long-term prospects of a company based on their respective due diligence—are a feature, not a bug, of our capital markets.
Market Structure Issues
Economists are essential partners in the difficult task of writing rules to protect investors and market integrity. You can help us analyze whether market behaviors are the natural outcome of supply and demand, innovation, and competition, or whether they are a consequence of the rules that govern that market. In the latter case, you can assist us in assessing whether regulation has changed the markets for better or worse.
Economists understand that markets effectively solve problems that look intractable to many a regulatory lawyer, and that regulation often exacerbates problems or creates new ones. A commitment to basic economic principles, however, helps combat tendencies toward regulatory micromanagement. Accordingly, today, I want to enlist your help in thinking about exchanges.
Market structure issues are notoriously complicated to diagnose and to resolve, but economic research can help us do both. We have spent a lot of time in recent years tinkering with equity market structure. I have supported some of those changes, including improvements to market data infrastructure, enhanced execution quality reporting requirements, and tick size changes. I have objected to others out of a concern that they would lead to inferior execution and decreased investor choice.
As I considered each equity markets initiative, even those I supported, I could not help but wonder: What would the market landscape look like if the SEC were not micromanaging it? Would we have so many exchanges? Would they be more heterogeneous? Would a single exchange offer different trading models? Would they be self-regulating, or would they have outsourced that responsibility? How would they charge for market data? Would off-exchange trading platforms, like ATSs, have developed differently or not at all? Would the internalization of trades be as prevalent? And, most important, would the market be better or worse for issuers, investors, and traders without all the micromanagement?
Conclusion
Even though our markets are regulated more intensely and with greater complexity than I would prefer, they work remarkably well. Retail investors have easier and cheaper access to these markets than ever. In the face of recent high volumes and volatility, the markets have performed well. Investors and issuers from all over the world look to U.S. markets to invest, raise capital, and trade. Altering the regulatory framework could diminish the quality of our markets, so we must undertake any change with care, proper deliberation, and concern for unintended consequences.
An audience of economists who appreciate opportunity costs recognizes that time spent on equity market structure is not available for other things. And many other issues clamor for the SEC’s attention.
