House subcommittee hearing looks at the state of US equity markets

The House Capital Markets, Securities and Investment Subcommittee held a hearing last week to examine the state of the U.S. equity markets, specifically regarding what is working well and what needs improvement.

One of the key themes expressed by experts is that despite significant technological advancements and constantly evolving industry practices, the statutory framework that governs equity market structure remains largely unchanged. Much of the discussion revolved around determining the appropriate statutory framework, one that builds in flexibility to allow markets to evolve and allow innovation.

“The U.S. equity markets are widely recognized for being the deepest, most liquid, and most competitive markets in the world,” Rep. Bill Huizenga (R-MI), the subcommittee chair, said. “However, it doesn’t mean that these markets are perfect and that there is no room for improvement. That is why a truly comprehensive review of equity market structure is long overdue.”

To move markets forward, the first step is to know where they have been, Huizenga said, which was the point of the hearing.

“In many ways, today’s markets bear little resemblance to those of just a decade ago,” Tom Wittman, executive vice president and global head of equities at NASDAQ, said. “The old images of brokers fielding telephone calls and floor traders hollering orders has long since given way to a profoundly interconnected, technology-driven marketplace that transacts across an astonishing array of exchanges and trading venues… Yet, as markets have advanced, the fundamental structure that underpins them has not evolved to benefit all markets segments equally.”

While the cost to invest in the U.S. equity marketplace is among the lowest in the world, Regulation NMS has also contributed to some unintended consequences throughout the marketplace, Chris Concannon, president and COO of Chicago Board of Options Exchange, said.

“Regulation NMS has created a complex and fragmented market, which may increase costs for some market participants,” Concannon said.

Jeff Brown, senior vice president, legislative and regulatory affairs at Charles Schwab, said as policymakers debate possible changes to the market structure, they must remember how efficient and resilient the U.S. equity market is.

“That being said, the evolution we have seen has created odd incentives and antiquated systems and everything should be on the table for review,” Brown said.

Thomas Farley, president of the New York Stock Exchange, encouraged lawmakers to “right-size” regulations so that all issuers and investors have access to the capital markets.