Trump, Volcker, Reg NMS and HFT

Torching regulation is hot. Since the Trump phenomena, the question being asked in Washington, D.C. is: What can we do to drive growth and put Americans to work? The answer seems to be… Tear up growth-hampering regulation, with the notion that “If we could just remove obstacles (read: regulation), we can drive growth, which would be great for Americans, America, and America’s position in the world.”

Currently there are a wide array of financial regulations on the way to in incinerator. But what would the market look like without these rules? Can we even go backwards? While many of the rules being discussed where only implemented a decade or so ago, technology, people, practices, and the business climate has changed. So, what would the world look like if we threw the rulebook into the fireplace?

That said, writing about the broad array of regulations in line for the incinerator is too much, for even this mid-sized note; for this piece I will focus on the major regulations that impact equity market structure and trading.

The laws in the crosshairs of equity markets participants are Regulation National Market System (Reg NMS), the Volcker Rule (Volcker), and the Third Basel Accord (Basel III) and the widely-anticipated follow-on rule known as Basel IV.

The Security and Exchange Commission’s (SEC) Reg NMS is a set of rules that drives how the equity markets operate and The Dodd–Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) is the post-crisis congressional act that not only encompasses the Volcker Rule but provides the authority to comply with the Basel III capital accords.

Tearing up Dodd-Frank and the Volcker Rule, for the most part, would not impact the equities market infrastructure. It would however impact the amount of capital banks can allocate to the equities business. Repealing Reg NMS, on the other hand, would have very specific application to the US equity markets. Reg NMS has four pillars: Order protection, market access, tick size definition (banning sub-penny pricing), and rules on how market data fees are collected and rebated to exchanges. All of these issues significantly impact how the US equity markets operate.

This note looks at the impacts of repealing both the Volcker Rule and Reg NMS on the US Equities market. It will investigate the process, the thinking and the most logical places to keep regulation where it is, and where to burn it down. It will also handicap the odds of repeal as well as who wins and who loses.