Too often in Washington when the heat is on an agency for something the public is focused it creates a committee rather than doing anything real or meaningful about the problem. The result is the appearance of action and a commitment to crafting good policy, but the reality is kicking the can down the road until the heat is off and the public has moved on.
That’s exactly what happened when best-seller Michael Lewis’ book “Flash Boys” was released in March 2015. In a compelling and concise way, Lewis made the rigged stock markets understandable to a broad audience and the book was a bombshell. It ignited a public firestorm and debate about rigged markets, predatory behavior, ripped off investors and much more.
The Securities and Exchange Commission (SEC) is supposed to be the lead cop on the Wall Street beat, so, naturally, everyone was asking what the SEC was going to do about these abuses and apparently illegal behavior. The heat was on and the SEC was feeling it.
Unfortunately, none of this was new to the SEC. Investor advocates, market participants and Better Markets had been asking the SEC to take action for years to stop it. However, it had done virtually nothing. But, the public was now engaged and enraged so the SEC had to finally do something. It faced a choice: it could take real, meaningful action like enacting rules and focusing enforcement resources or it could form a committee to “study” the issues and make recommendations over the next few years.
You guessed it. On January 2015,the SEC, rather than beginning in earnest to fix our broken markets (the title of another great book about the rigged markets published three years earlier in 2012), formed the Equity Market Structure Advisory Committee (EMSAC). While hoping for the best, but preparing for what is too often turns out to be a do-nothing distraction, Better Markets decided to watchdog the EMSAC and its work. We were not going to let the EMSAC be used to try to fool the public into thinking there was real action in the interest of the investors, when it was really a smokescreen for the incumbent industry to protect their profits and businesses from competition, scrutiny and proper regulation. We were going to call them out and shine a bright light on any failings.
That didn’t take long. The EMSAC has been a disappointment from the start, which, given its composition and lack of ambitious agenda, is not surprising. The EMSAC’s original fatal flaw is that thirteen of the seventeen members are representatives of the industry who have a vested interest in the status quo. A committee so overwhelmingly dominated by the industry could not have produced any meaningful reform of our broken markets.
Making matters much worse, Better Markets learned that three firms represented on the EMSAC had committed or been implicated in serious violations of the SEC’s market structure rules – the very SEC rules the Committee is charged with improving.
Better Markets raised concerns about these issues as far back as October of 2015. In a letter to then-SEC Chair Mary Jo White, who was the principal champion of EMSAC, we called for the immediate removal of the members of the committee associated with the lawbreaking firms, and asked for a public explanation how these members were selected.
We also argued that an “excessive concentration of industry representatives will limit the Committee’s ability to objectively diagnose the problems in our markets and recommend valuable solutions.” In op-eds and media appearances, we argued that if not properly constituted with fair representation of members who seek to protect the public interest, the Committee threatens to do more harm than good.
We called out the EMSAC when it continued to ignore the uneven playing field that unfairly advantages certain market participants over others. We brought attention to the SEC’s inaction on these matters when EMSAC failed to finalize a recommendation for a mere pilot program to examine ways to simplify the convoluted and questionable fee arrangements that exchanges offer. This failure – to recommend even a pilot program – shows how the incumbent industry members on EMSAC and the for-profit exchanges all have conflicts of interest and are key cogs in the current rigged system.
Better Markets, yet again, brought attention to EMSAC when it sunk to a new low in November of last year when it voted down a recommendation which would have asked SEC’s Investor Advocate to conduct periodic surveys on retail investor confidence and concerns. They didn’t even want to know what investors were thinking or concerned about.
Credit where credit is due: after years of unrelenting criticism from Better Markets, the SEC nonetheless invited us to participate in EMSAC’s most recent meeting to discuss several recommendations on regulatory centralization. Better Markets offered a broad critique of the state of large exchanges, arguing that today’s large exchanges that also conduct self-regulatory functions are conflicted to the core.
Regardless of what the future holds for EMSAC, it is undeniable that it has utterly failed to do the job it was supposedly created to do and it has failed to serve the public interest. However, because of the attention Better Markets has brought to its structure and activities, at least it couldn’t be used as a smokescreen to defraud the public into thinking that anyone was taking real action here or acting in investors’ best interest. Unfortunately, EMSAC’s existence alone nevertheless helped take the heat off the SEC that “Flash Boys” created and the public attention has waned.
This is bad news for everyone because critical problems continue to plague our markets and investors, which crushes confidence and reduces the amount of capital available to our economy. That’s why rigged markets are bad for everyone, not just those ripped off. Market structure problems will not fix themselves and they will not be fixed by the very firms that profit from the flawed structure that is rigged today. That’s why we continue to fight for fundamental change and will continue to press the SEC to do its job.