Efforts to create a more level playing field for share trading in the United States have
so far had mixed results and unintended consequences.
Share trading seems to have evolved only so much. Just when things appear more transparent
and simple, new complications arise.
How Is This Article Useful to Practitioners?
Share trading in the United States has made strides over the decades, but new concerns have
come up. Trading costs have declined markedly over time because of increased competition and
the addition of alternate venues. In 2005, the SEC adopted Regulation National Market System
(NMS), which requires share-trading orders to be directed to the exchange that offers the
best price. That rule broke the decades-old NYSE and NASDAQ duopoly. Both now have less than
a 20% share of the market. Investors can purchase shares on numerous exchanges, alternative
trading systems, and single-dealer platforms. Internalized trading occurs at large asset
managers and banks that eschew outside trading venues. The trading landscape seems to be
rich in opportunity.
But this abundance of choices is worrying investors who are concerned about the rise of
hidden costs, increased risk, and lack of fairness. One such concern is that high-frequency
traders can front-run ordinary investors, forcing prices in a disadvantageous direction.
Another concern is that high-speed trading could compromise the robustness of market
infrastructure. In fact, regulators are still struggling to explain the 2010 “flash
crash” that caused a precipitous intraday share drop. Credit Suisse and Barclays
recently paid fines for misinforming clients about how their dark pools worked.
Many high-speed traders are market makers who match purchases and sales. But that has not
lessened concerns about rigged markets and unanticipated spasms because of glitches. Trading
platform IEX has proposed a solution to delay trades for the benefit of institutional
investors. To that end, it has applied to the SEC to become an exchange, but it may not
satisfy the parameters of Regulation NMS. MIT finance professor Andrew Lo has proposed the
creation of a commission to compel testimony and gather evidence to investigate market
crashes, analogous to the work of the National Transportation Safety Board. Unfortunately,
although well intentioned, numerous proposals may exacerbate market complexity rather than
The evolution of share trading in the United States may not have simplified things as
intended. Greater speed and transparency may have created unintended consequences in the
form of trading interruptions and rigged systems. Regulators and policymakers have been
weighing in but so far to little or no avail.