The Wall Street Journal reports that two Congressmen (Sean Duffy of Tick Pilot fame and NY Representative Meeks have reiterated the arguments made by the NYSE, in a letter that calls for the SEC to reject the Bats Market on Close proposal. This is truly sad. One of the first principles of good regulation is NOT to pick winners and losers among participants, and this type of politicization violates that principle. The American people deserve better from their elected representatives than for them to spend their time taking sides in a technical debate between corporations. It is worse, because, in this case, they did not bother to spend the time to develop a full understanding of the issues or the consequences of what they demand. To underscore this point, I would happily explain this to either Congressman (either privately or in public), and urge them to read a recent article which explains quite well why they are wrong. (I will not, however be willing to “contribute” to either’s campaign to have the privilege of meeting with them).
The worst part, however, is that their argument is hollow. As I explained in my comment letter on this issue not only will this proposal not interfere at all with the Price discovery function of the closing auction, but the most likely result is more volume at the closing price and a higher level of confidence in the process. More important is that this proposal will likely result in a less fragmented, less complex market than if the SEC denies the proposal. This, as I explained, is because it is likely that one or more ATSs can offer the same Market-On-Close “pre-matching” function, now that it is clear that there would be demand from the industry. In that case, it would require a major change in SEC policy for them to stop such developments since the functionality resembles the type of reference price crossing that is already allowed. So, in essence, the real question is if the market is better served by an SRO filling this need, or if the market is better off with multiple, competing, less regulated entities offering the service. I listed several reasons why Bats is a better outcome in my letter, but the point is relatively obvious.
It is also worth mentioning that, the entire notion of objecting to this proposal on the grounds it would introduce complexity, is pretty ironic, since Representative Duffy is the politician who pushed the hardest to get the Tick Pilot mandated. That incredibly “complex” and poorly designed program is very unlikely to justify the expense it created. It has not proven much and seems unlikely to, but now he is calling on the SEC to reject the Bats proposal because it would make the markets too “complex”. As Inigo Montoya said in the Princess Bride, Congressman: “I do not think that word means what you think it means.”