Why Propose HR3555 The Exchange Regulatory Improvement Act?

A new bill was just introduced by Representative Loudermilk (R-GA), that appears to amend the Securities and Exchange Act of 1934 to basically reduce or eliminate regulation overreach into business models of exchanges that do not involve either reporting or effecting a transaction on the exchange.  As Representative Loudermilk stated 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”.

What Could Drive the Proposal of HR3555?

Since the publication of Flash Boys in 2014, there has been a flurry of lawsuits against dark pools and exchanges, amid accusations of market rigging with aiding HFT activity, in essence aiding and enabling unfair trading.  One particular lawsuit alleged that dark pool Barclays, in addition to 7 US stock exchanges, including The NYSE and Nasdaq, manipulated pools to give HFTs market advantages.  Day Traders everywhere were watching the outcome as this has been a frustrating development in the market for quite a long time.  

This groundbreaking lawsuit brought under U.S. District Judge Jesse Furman was a consolidation of one suit from the State of California with four suits from the District of New York, and was eventually thrown out in August of 2015.  Counsel for the defendants claimed that the Plaintiffs rushed into a lawsuit without taking the time to properly plead their case, partially brought on by the allegations in the book Flash Boys.  

The Judge threw out the lawsuit stating that stock exchanges had immunity because their actions fell within “quasi government” powers.

While the exchanges and dark pools may have won the battle, the war is far from over.  

We’ll be watching the outcome of Bill HR3555, and what the Committee has to say.

Great Point Capital has been serving the trading community since 2001, with 100+ prop traders actively trading the firm’s capital.  Headquartered in Chicago with offices in Austin, TX, we specialize in equities and equity options.  Contact us today to learn how we can successfully trade together with high performance results.  We are one of the few firms able to offer access to Takion Software Platform, enhancing your online equity trading experience.  

Exchanges Seeking Immunity with Bill HR3555

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.

Great Point Capital has been serving the trading community since 2001, with 100+ prop traders actively trading the firm’s capital.  Headquartered in Chicago with offices in Austin, TX, we specialize in equities and equity options.  Contact us today to learn how we can successfully trade together with high performance results.  We are one of the few firms able to offer access to Takion Software Platform, enhancing your online equity trading experience.

Does Bill HR3555 Present a Potential Conflict?

A new bill was just introduced by Representative Loudermilk (R-GA), which would amend the Securities and Exchange Act of 1934 to reduce or eliminate regulation overreach into business models of exchanges that do not involve either reporting or effecting a transaction on the exchange.  This may have been prompted by the flurry of lawsuits following the publication of Michael Lewis’ Flash Boys.  One such lawsuit was thrown out when the judge claimed the exchanges had immunity under quasi-government powers.  

Since the filing of the combined lawsuits, the Securities and Exchange Committee (SEC) commented by saying that they had no authority to adjudicate the lawsuit, and that “immunity only applied when stock exchanges acted as a regulator, and not as an operator of a market”.  This means that the SEC is stating that exchanges are NOT entitled to absolute immunity arising from commercial activities such as enriched data feeds or selling collocation.

This could be weighing on the minds of the executives of the exchanges, prompting the proposal of HR3555.   The bill must pass the House and Senate before becoming law and will most likely be reviewed by committee before it’s sent to the House.  

If passed, Loudermilk’s bill appears to give protection from investor lawsuits stemming from unfair advantages granted to HFT firms.  The implied intent is to skirt the SEC’s role of protecting investors by finding a way around them in Congress.  Just by adding one paragraph to the original Securities Exchange Act of 1934, the SEC could be prevented from acting as a regulator of stock exchanges for any issue surrounding the selling of speed.  

Potential Conflict?

If HR3555 removes the non-execution portions of their business from regulation, wouldn’t that also remove those from their immunity? That would take it out from under SEC regulation, but it seems that it would also take it out from under the immunity umbrella afforded to “quasi-government” stock exchange activities.

If they carve out those activities from those regulated under the SEC Act of 1934, how could they then claim immunity for the removed activities? They would have it both ways – not included under the Exchange umbrella for regulatory purposes, but included when courts look at immunity granted to Exchanges.

We will be watching the progress on HR3555 as it moves through the legislative process.

Great Point Capital has been serving the trading community since 2001, with 100+ prop traders actively trading the firm’s capital.  Headquartered in Chicago with offices in Austin, TX, we specialize in equities and equity options.  Contact us today to learn how we can successfully trade together with high performance results.  We are one of the few firms able to offer access to Takion Software Platform, enhancing your online equity trading experience.