Representative Loudermilk (R-GA) just introduced a new bill which would amend the Securities and Exchange Act of 1934 to eliminate or reduce regulation overreach into business practices of exchanges that do not involve either effecting or reporting a transaction on the exchange. As Representative Loudermilk put it in the following statement when introducing the bill, “Regulatory agencies have a tendency to expand their reach into areas they should not be regulating and engage in mission creep, which can stifle innovation”.
If the innovation referred to is the exchanges seizing the opportunity to create new revenue flows by selling speed, rather than effecting and recording transactions, then perhaps we need regulation overreach.
The current unprecedented structure of exchanges and dark pools is drastically different than a decade ago. It seems that HR3555 would put safeguards in place to prevent agency over-regulation, or in other words would allow regulators to turn a blind eye to the new market structure by not addressing these issues. This is an issue that Day Traders everywhere have been dealing with for at least the last decade.
HR3555, titled The Exchange Regulatory Improvement Act, aims to further define the term “facility” regarding regulatory purposes of an exchange, adding that the term does not refer to business activities with a purpose that is not intended to either report or effect a transaction on the exchange.
What this means in simple terms is that this bill attempts to provide an exempt status, or altogether immunity, for an exchange’s business activities outside the core functions of effecting and reporting trades.
Exchange Activities Receiving Immunity
We need to understand the activities in question To understand the effect that passing HR3555 would have. Exchanges today make money in ways other than facilitating trades. The most recognized activities include colocation of servers, enhanced proprietary data feeds, and complex order types all designed to give an unfair advantage to high frequency traders (HFT). HFT firms currently make up at least 50% of all trading activity in US Markets. For more information on how stock exchanges earn revenue with business activities other than recording or effecting trades, check out this post on How Rising Costs of Stock Exchange Data Fees Affect Online Equity Trading.
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