The Future of U.S. Market Structure

Spurred by regulatory incentives and the spread of high-speed technology, financial markets have become increasingly automated over the last decade. These trends have created greater competition among markets but also a more fragmented market structure.

The U.S. Senate Banking Committee looked into whether increasing automation and spread of dark pools are putting retail investors at a disadvantage. Senator Jack Reed, chairman of the Securities, Insurance, and Investment subcommittee, said “there is a legitimate question…about how dark pools are operating and how they will evolve. What you are seeing is a growth of dark pools and this raises the question about whether people are getting the best prices.”

Currently, there are more than 40 dark pools operating in the U.S.  Trading in these venues has doubled since early 2008, reports the Wall Street Journal.

Joe Mecane, NYSE Euronext’s head of U.S. equities, suggested “that if enough [trade] flow migrates away from public markets…it [will continue] to degrade the quality of the public market.” Mecane testified that “more than 3,000 securities have over 40% of their volume occurring off-exchange in dark markets.” One of the advantages of dark pools and other private trading venues, he argues, is that they can offer their clients a “first look” at trades and access to liquidity “before routing on to the lit public markets.”

While Mecane believes that U.S. capital markets remain “the best in the world,” they could be improved through the SEC continuing its “holistic review” of market structure and proposing regulatory changes that will provide “additional transparency, fairness and long term capital formation.”