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02:58 PM
Sal Arnuk
Sal Arnuk
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A Toast to Mary and 10 Suggestions for the New SEC Commissioner

Mary Schapiro's efforts to clean up our marketplace are her legacy.

On Monday Chairman Mary Schapiro made official her departure as head of the Securities and Exchange Commission; she will serve until December 14. Her tenure will have been longer than 24 of the preceding 28 SEC Chairmen.

In addition she also served as a commissioner at the SEC between 1988 and 1994, and as active chairman in 1993 – a brief position she held just before President Clinton appointed her to head the Commodity Futures Trading Commission. She is the only person to have served as chairman of both the SEC and CFTC. More recently, between 2006 and 2009, she served as the CEO of FINRA.

The Securities and Exchange Commission, over the last twenty years, has been led by five different chairmen:

  • Arthur Levitt (1993-2001)
  • Harvey Pitt (2001-2003)
  • William Donaldson (2003-2005)
  • Christopher Cox (2005-2009)
  • Mary Schapiro (2009-2012)
  • The chairmen listed above who have had the greatest legacy, or lasting effects on our markets, are in our opinion the first and last ones on the list – Levitt and Schapiro.

    We have discussed Levitt's role in shaping our current fragmented market structure in great detail in our book, Broken Markets. His role was creationary – his desire for competition in the securities markets resulted in his championing of the Order Handling Rules, Reg ATS, and decimalization. Ironically, competition has been on the wane as a result of Reg NMS. Have you all noticed the marked decline in market makers at the major exchanges? Said another way, Arthur Levitt is the father of our fragmented high frequency marketplace.

    While we view Levitt's role in shaping our market structure as creationary, Chairman Schapiro's efforts to clean up our marketplace are her legacy. Her role has been remediary. She took helm at the SEC in the midst of the greatest financial crisis this country had ever seen, and in a hostile environment where the masses were demanding the abolition of the SEC. With a woefully inadequate budget, she was saddled with an immense Dodd Frank rulemaking burden , a rapidly deteriorating market structure – one in which she spearheaded a concept release to address what she knew were known problems in our market's plumbing, before the Flash Crash. At each attempt at reform she had to thwart an army of lobbyists, as well as their friends on the House Financial Committee. Talk about inheriting a bag of crap.

    With all these hurdles she must be given credit for her accomplishments:

    • Stock circuit breakers
    • Banning of stub quotes
    • Banning of Naked Access
    • Creation of a framework for the Consolidated Audit Trail
    • Record insider-trading enforcement.
    • There is no shortage of pundits critical of her job at the SEC, but perhaps they would do better to direct their outrage at the system/machine of politics and lobbyists that has infiltrated all aspects of Washington DC, including the SEC. So stop hatin' on Mary!

      Elisse Walter is now designated as acting chairman; we presume there will be a more permanent replacement appointed in the near future – complete with a Senate confirmation process. We humbly would like to make some suggestions to whomever Schapiro's replacement may be:

      1. On Day One demand to have the SEC's budget doubled.

      2. Eliminate the revolving door between the SEC and Wall Street. There is at least the appearance of a conflict of interest here that needs to be eradicated.

      3. Get out of the habit of relying so heavily on the industry you regulate for advice and input. Hire fewer lawyers, fewer economists, and more "outsiders." Heck - hire Eric at Nanex. Throw him in trading and markets and stand back and watch what happens.

      4. Overhaul the SRO Rulemaking Process by creating an industry advisory committee that votes on all new rule proposals. Such an industry committee should include investor representatives, as well as representatives from stock exchanges and broker dealers.

      5. Eliminate payment for order flow in our markets at all levels – this includes the practice of wholesale internalization as well as the rebate maker-taker model.

      6. Level the playing field between exchanges and brokers – they are all in each other's businesses anyway – and make all trading venues completely and publicly transparent with regard to how they operate, match stocks, as well as the incentives they have for different clients.

      7. Simplify the markets. Having 40% of all order flow trade in the dark does not serve the public. Consider a Trade-At rule that requires meaningful price improvement, and perhaps meaningful minimum size requirements for orders to trade away from the public market place. The sanctity of our public markets needs to be a priority for public confidence, price discovery, and capital formation.

      8. Don't be afraid to experiment with pilot programs. Whether wider tick increments, dark pool proposals, or even cancellation fees are under consideration, take the risk and implement. Doing nothing is not an option. Investors don't pay money managers to hold cash, and they don't pay police to sit back and do nothing.

      9. Learn how to tell the House Financial Committee to Step Off. Any request or letter from a member of Congress should be initially met with a return request to see their campaign finances, list of recent meetings with industry insiders, as well as disclosures.

      10. Thicken your skin. You will need it. Good luck and Godspeed!

      Joe Saluzzi and Sal Arnuk sent this note to clients earlier this week following Mary Schapiro's announcement.

      Sal Arnuk is partner, co-founder and co-head of equity trading of Themis Trading LLC. Mr. Arnuk has extensive experience in equities trading and is an expert in electronic trading and market structure. He is also the co-author of Broken Markets -- How High Frequency Trading ... View Full Bio
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