NEW YORK Nov 19 A former Fidelity Investments vice president who ran the firm's Nasdaq trading department has called for the U.S. Securities and Exchange Commission to roll back one of its rules on stock trading.
In a paper, Leslie Seff, who ran trading departments that provided liquidity for specific stocks, said the current market structure impeded initial public offerings and relied too heavily on high-frequency trading.
Seff called for the SEC to repeal part of a 2007 package of rules called Reg NMS that requires dealers to meet every order for a stock at a given price anywhere in the marketplace, even if the price is just a tiny fraction higher than a large order waiting to be filled.
This change would eliminate some high-frequency trading firms' practice of using powerful computers to react in split-seconds to other market activity, such as a block order by a pension or investment management fund, and take advantage of tiny price differences.
"The equity markets are being kept alive by an unhealthy addiction," Seff wrote in the paper circulated by consulting firm Matthew B. Management, of which he is president. "Nasdaq and the New York Stock Exchange are being supported by the activity of the high frequency trader."
In its January 2010 concept release on market structure, the SEC examined the possibility of making a change similar to the one Seff advocates. Rather than a repeal the earlier rule, the concept release contained a proposal for a new "trade-at" rule that would require dealers to fill an order on a specific trading platform instead of searching for the best price in the marketplace overall.
The number of IPOs has fallen over the past decade. According to Grant Thornton, there were an average of 530 new issues a year between 1991 and 2000, but since 2001, that has dropped to 126.
Volume in the stock market is also hovering near lows reached during the 2008 financial crisis, despite a rally in share prices that has brought the major indexes back toward all-time highs.
Seff called for other changes to the marketplace as well. He argued for a new requirement that would widen spreads between bids and offers for recently issued stocks and forthcoming IPOs. If these mandated spreads worked, they could be extended to all stocks.
These spreads would attract more traditional stock dealers into the market, reducing reliance on high-frequency trading for liquidity in certain stocks and possibly preventing a repeat of the May 6, 2010, "flash crash," in which the Dow Jones industrial average plunged 700 points in a matter of seconds.