Tim Bourgaize Murray: Making Lists, Taking Names

Big or small, it’s the first thing any organization does when facing a new problem: take account of the landscape and start making lists. Of course, this can be very productive—whiteboards everywhere are filled with marker for a reason. The same modern psychology, though, can be used to categorize or coerce when it’s applied to people or groups. In 2015, we’re asked to register ourselves and self-identify certain traits all the time, proving that it’s primarily the motive, rather than the means, that distinguishes this activity as good or bad.

Twin Initiatives

Obviously the industry’s twin initiatives going on at the moment— registration of quants and developers, and registration of certain firms not already members of Finra—is far from imperial. But it’s not really surprising that these would be the SEC’s first steps in getting a better handle on the technology side of the markets that it is meant to oversee.

First of all, it’s relatively simple—maintaining a list is incredibly easy compared to re-engineering Reg NMS. I even look forward to seeing a Buzzfeed-style HFT listicle at some point. (I wouldn't be surprised if it's already been done). Second, the industry hasn’t raised a ton of objection on either front. And with quick wins few and far between for regulators, this has regulators pushing forward with unusual alacrity.

Legitimate Questions

But there are at least two legitimate questions to ask about a newfound desire to pull every HFT entity into the Finra fold, and every technologist onto a register. Quite plainly, they are: will it achieve the desired ends, and is it right?

Defining who is a technologist is and what she or he does is one thing. But several sources I spoke to this month for a feature on the re-legislation of SEC 15b9-1—the rule covering Finra membership—were concerned that this is just the latest in a tiring series of regulatory adjustments that does little more than add additional pain and one more hoop to jump through, even as liquidity providers in certain markets are already having second thoughts. Putting aside the cost, “It’s a whole new universe of regulation they’ll have to deal with,” as one counsel put it of small firms forcibly joining Finra.

As, to that point, a former prop shop trader also told me the perception remains that both the regulator and the SRO pick at the small stuff a little too much, while missing the bigger picture.

“You’ll have an insider trade going on, where someone buys 10,000 front-month call contracts that usually only see 100 daily across the market, and the next day comes an announcement that the company’s getting taken over for a 20 percent premium,” he said. “They’re asking us about breaching a minor limit on quotes, or being out of the market on an illiquid equity for 15 minutes, when that person just ripped $10 million out of the market.”

Proof Positive

While most agree that it doesn’t make sense to have a small group of HFT shops operating under a blanket exemption that was written more than three decades ago, some argue that the push highlights a broader issue of balance: not enough is being done to encourage market-makers—high-speed specialists or otherwise—to stick around, reflecting a post-crisis culture at the Commission that avers any perception of advantaging traders at the expense of mom and pop. There’s a lot of stick right now, not enough carrot, they say. And they’re not convinced the stick is even effective.

Like most things, the proof will ultimately be in the pudding. Making lists and taking names may come to little, or it could have a significant impact on a certain class of firms (and people) for whom there is currently not a ton of sympathy. It could bounce a few shops out of the market and thin liquidity out here and there, which seems troublesome. Or perhaps they’re blowing smoke about this being the final straw.

Either way, it’s yet more proof positive that regulators now care about technology in a way that they previously didn’t. Whether that truly matters, though, probably depends on what’s coming next.