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Dave Lauer Headshot

No More Hiding From Regulators

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There is no doubt anymore that our modern market structure has problems. Nobody with a fully functioning frontal lobe will tell you that it doesn't. Still, as obvious as it is that things are broken, many of us disagree on exactly what is broken and how to go about fixing it. This diversity of opinions is natural and healthy but not necessarily productive.

One common refrain is that regulators have fallen behind technologically and that they have a lot of catching up to do. Again, this is a point that few will argue, even if many would also say that catch-up is an impossible game to play. I'd probably agree with that, but that doesn't mean that regulators shouldn't at least try to "co-evolve" with a complex industry that is itself in a state of constant evolution.

Today, market structure issues are a critical deterrent for the average person -- although few would phrase it this way. They would say things like "I don't understand the market," "it's too volatile," "I've been burned too many times," "it's a casino where anything goes, and nobody is being held accountable." These concerns tell the dual story of an ailing market structure and a toothless regulatory body.

And let's not kid ourselves, there is criminal activity taking place in our stock market. It happens every day, sometimes hundreds or thousands of times in a matter of seconds. There has always been and always will be criminal activity in the stock market. Money and cheating are close relations. The difference today is that criminals can use technology to cover their tracks, to cloak themselves in anonymity, and to reduce the SEC and FINRA to oblivious bystanders. These regulatory agencies have no real-time monitoring capabilities, and no way to connect orders in the market to participants that have entered those orders, at least not in a reasonable, scalable, seamless way.

Instead of technology bringing about a revolution in surveillance and enforcement, we've seen the opposite.

It's time for change, and right away. Waiting for the Consolidated Audit Trail is a fool's errand. The SEC has a system called MIDAS that is capable of doing this, it simply needs better data. The SEC can mandate that unique IDs are tied to every order entered into the market, preferably at the level of the trader who is entering it, but at the very least at the firm-level. If we consign ourselves to firm-level IDs, these already exist in the form of Large Trader IDs. Otherwise, a simple strategy registration system can be built, as described in my Congressional testimony and SEC Roundtable comment letter.

These IDs must be made available by the exchanges, ATS's and ECN's on a privileged market data feed that only the SEC and FINRA can see. This includes dark pools, which must also be required to send the SEC and FINRA, on a real-time basis, all orders that they are receiving. The SEC must have a complete view of the equity markets, not just 60 percent of what's going on.

For those who know anything about the technology that underpins the current market, and order entry protocols, you recognize that this proposal is straightforward. I'm not saying it's easy. Nothing ever is when a group of entrenched players are fighting tooth-and-nail against any reform whatsoever. But it is a change that could be made in a matter of months, if the will is there. It would accelerate SEC enforcement efforts immeasurably, and have a chilling effect on nefarious behavior by removing the cloak of anonymity.

I have been pushing for this idea for almost a year now, and there has been no movement on it, despite calls from Congress and even agreement by the SEC itself on the usefulness that this functionality would provide. Only criminals have cause to oppose this measure. Indeed, their continued lobbying efforts have helped to blunt any progress on such a simple and obvious reform.

It's time for all of us to identify ourselves in the market and time for regulators to crack down on criminal behavior. And the fines collected would pay many times over for the cost of pushing this forward. That would at least begin the process of renewing confidence in the markets for the retail investor. You might be amazed at what a few perp walks can accomplish.