In the latest example of the dominance of financial services interests in Washington, a committee set up by the Securities and Exchange Commission supposedly to ensure that our equity markets serve the public interest includes representation by firms accused of the very kinds of wrongdoing such an effort should combat.
In response to intense public pressure over the high-profile reports that the equity markets were "rigged" and ripping off investors, the SEC created the Equity Market Structure Advisory Committee earlier this year, claiming it was a way to bring together experts to examine our equity markets and the extent to which they're functioning effectively for the American people. For years, there have been many concerns about significant defects in the equity markets, including issues like dysfunctional market structure and predatory high-frequency trading. Such trading has been linked to "flash crashes," where the market plunges and recovers trillions of dollars in a matter of minutes. The SEC claimed that it was finally going to bring together people dedicated to finding solutions that serve the public interest, not the industry status quo. At least, that's what was supposed to happen. But, unfortunately the committee was stacked with industry insiders.
The majority of the committee members represent financial firms. Worse yet, at least three of these firms — Investment Technology Group, Convergex and Barclays PLC — have been implicated in serious wrongdoing, including dark pool and high-frequency-trading violations.
In August of this year, ITG agreed to pay $20.3 million for allegedly operating a proprietary trading desk that used knowledge of customer requests to trade for its own benefit, leveraging data that other users of the dark pool did not have. Andrew Ceresney, director of the SEC's enforcement division, called this conduct "egregious," and said that "the abuse of confidential information is significant." The fine was the largest ever for such misconduct and ITG admitted wrongdoing as part of the settlement, a first for a dark-pool-related case. Perhaps most incredibly, ITG's board approved of this illegal, secret conduct. Yet, the chair of ITG's board was appointed to the committee while the SEC's investigation was ongoing.
In December 2013, Convergex agreed to pay more than $151 million to settle criminal and civil charges related to routing trades through an offshore affiliate to generate secret commissions. Traders with the company were accused of hiding markups by fabricating details about execution orders and sending false transaction reports to clients. Unwitting investors — including charities, religious organizations, retirement plans, governments, and universities — ultimately paid tens of millions of dollars in unwarranted fees in what prosecutors called an "astonishingly brazen" fraud.
Barclays PLC has recently been embroiled in multiple controversies and lawsuits alleging the manipulation of markets to benefit high-frequency traders. In a nationwide class-action suit, a number of pension funds and other investors accused Barclays and seven exchanges of giving high-frequency traders favored treatment, costing less-favored investors billions of dollars. Although the lawsuit was dismissed on technical grounds, the court nevertheless recognized the potentially serious nature of the alleged misconduct. The New York Attorney General's Office is now investigating the same alleged misconduct.
Those aren't the values the American people expect from members of a committee designed to look out for their interests. Confidence in our markets has already been weakened by years of industry scandal and unexplained stock market crashes that have exposed deep and dangerous fault lines in our markets and regulatory structures. We cannot trust an industry-dominated body — especially one that includes firms implicated in malfeasance — to restore public trust in our markets.
That's why the SEC should immediately remove the representatives of these three firms from the committee and reconstitute it with a majority of members who are focused on the public interest. Industry input and participation on the committee will remain essential. But there are plenty of people and firms in the industry who play by the rules, serve their clients and don't break the law. It's not too much to ask that the SEC put them on the committee.
The SEC should also publicly explain how these companies ended up on the committee in the first place. Finally, the SEC should also take transparent steps to assure that future appointments to the committee actually align with its goal of protecting investors. That means no more wrongdoers. And it also means a committee that's made up of a majority of members looking out for the public interest, not for Wall Street.
Dennis Kelleher is president and CEO of Better Markets. Follow him on Twitter @BetterMarkets.