One characteristic of resilient systems is diversity. Another is adaptability to change (aka, ability to continuously evolve - usually fostered by competition and 'creative destruction' in capitalist economies such as ours.) In light of challenges to the financial industry's technology resilience that 9-11 presented (and that have since been quietly resolved), it's particularly ironic and sad that the SEC is expected on Wednesday to adopt policy that will stifle diversity and evolution, reducing the financial industry's overall business resilience.
Commentary today (subscription required) by the Wall Street Journal's editorial board notes that:
By voting to not only perpetuate the outmoded "trade-through" rule but extend it further, [SEC Chairman William] Donaldson will be handing a plum to his old employers at the Big Board who want to protect their "specialist" trading system. Along the way he'll be saddling the nation's investors with less efficiency and competition... newer electronic networks such as Instinet or Archipelago... have succeeded because they understand that investors value other things as well as price -- certainty of execution, speed, anonymity -- and use them to attract business. This sort of healthy competition is forbidden by the trade-through rule, which demands that traders buy securities on price alone. All of which is why the SEC's original idea was to give investors more choice by providing a trade-through opt-out... in December of last year, [the SEC] extended for the third time a pilot program that gives limited relief from the trade-through rule to certain exchange-traded funds. The extension was granted because the pilot has been successful at improving liquidity and making the market more efficient. Why introduce a pilot if you're going to ignore its success? Mr. Donaldson has also ignored the growing body of academic evidence showing that the quickest way to well-functioning markets -- with the best prices, low bid-ask spreads, efficient price discovery and reduced volatility -- is competition. Many statistics already bear out the benefits to investors... We're left to conclude that this is all being engineered to help the NYSE. The Big Board is gradually introducing technology that will help it to better compete with faster electronic networks. But it needs time for the transition, and Mr. Donaldson is apparently acting as its protector. We have nothing against the NYSE's specialist trading system, if it is able to hold its own in the marketplace. But giving the Big Board special protections goes contrary to the very mission of the SEC -- which is to promote competitive and efficient markets.
As is true with computer viruses and a near monoculture of Microsoft systems (or agricultural pests and a lack of crop diversity), so too with the NYSE's near monopoly on the domestic (and increasingly the non-U.S.) securities industry. When one big, complacent, politically connected entity dominates so completely - even if they can point to diligent efforts to modernize themselves - they become a more tempting target, while leaving the broader industry vulnerable to any problems they may experience. The new SEC policy is a dangerous move not only for investors, but for the survival and global competitiveness of the entire U.S. financial industry.
UPDATE: More useful background on the trade-through rule in this post at Belligerati.
Comments