| NEW YORK, April 15
NEW YORK, April 15 A desire by investors for
more investment products contributes to excessive complexity in
the U.S. stock market, the U.S. securities regulator in charge
of analyzing the stock market's structure said on Tuesday.
The argument that some market participants are continuously
seeking to outperform each other through faster and new
technology is incomplete, said Gregg Berman, an associate
director at the Securities and Exchange Commission.
While the argument has merit, the desire of investors for
new products to invest in, such as the explosion in the number
of exchange-traded funds and similar products, has required an
unavoidable increase in the market's complexity, Berman said.
This complexity also is driving the need for more and faster
technologies, Berman told a New York conference about trading.
The speech comes at a time "high-frequency trading" faces
fresh scrutiny by law enforcement and securities regulators
after an explosive new book by author Michael Lewis that alleges
the market is rigged in favor of the tech-savvy traders.
The book portrays a marketplace heavily reliant on expensive
technology at the expense of investors who cannot afford to keep
pace with the spiraling arms race.
Also on Tuesday, Nobel economics winner Joseph Stiglitz in a
paper presented at a Federal Reserve conference in Atlanta again
questioned the social value of high-frequency trading.
Berman acknowledged the market is complex, but so is society
he said, pointing to the capabilities of his smart phone. But he
asked whether the market is too complex or whether it's driven
by a desire for more products, like his phone and its countless
"What does it mean for something to be too complex? I
consider a system to be too complex if it has more complexity,
more moving parts, more stuff - than is required to meet the
desires of its users," Berman said.
After a long analysis of stock quote cancellations, which he
said debunked many misconceptions about their usage, Berman
found that an increase in quotations has been driven by rising
usage of ETFs and related arbitrage activity.
"These products require market participants to engage in a
lot of active quoting and cancelling if investors want to
receive fair prices when they buy or sell these products," he
The result is greater complexity. "More linkages are created
and more speed, and certainly more computing power is needed to
continue to ensure prices stay in line," he said.
Berman emphasized that he did not find the increase in ETFs
worrisome or problematic. His observations came after a study of
order cancellations over a 21-month period by staff using the
SEC's Market Information and Data Analysis System, or MIDAS.
(Reporting by Herbert Lash; Editing by Cynthia Osterman)