Want Efficient Markets? Let SEC Phase Itself Out
September 6, 2010
John Harris wants the Securities and Exchange Commission to die. And the Texas native told it so, in no uncertain words, in a comment letter on August 12.
"The Commission's consolidated audit trail concept is despicable, a Big Brother/Total Information Awareness program for financial transactions. If made effective, this vile scheme would invade the privacy of every American transacting in U.S. securities markets. It is difficult to conceive of a more monstrous, arrogant, destructive proposal. Shame on you for promulgating this trash. Do your fellow Americans a favor and resign in shame," he wrote, in response to the federal agency's proposal to create an auditable trail of all securities transactions.
The SEC's presence gives investors a false sense of security that their interests are being protected, a la Madoff.
It raises the cost of doing business and retards innovation. A decade or so ago, if you wanted to set up an electronic communications network and let other actors worry about the business they did over your pipes, you couldn't. You had to register as a broker-dealer. But AT&T, MCI and the regional Bells could continue to let their pipes be used to conduct the same business, by voice. You didn't see them registering to be dealers then. Or now.
Harris is founder and chief executive of a developer of exchange and market data systems called BondMart Technologies. It's been in startup mode since before 9/11. He may or may not be the next Liquidnet, for bonds. But he'd like to give it an unfettered shot.
From where he stands, electronic markets can solve themselves. Engaged investors can figure out which other investors to get engaged with. If counterparties' profiles online don't look squeaky clean, buyers or sellers don't have to do business with each other. Just like on Facebook you don't have to be friends with anyone who happens to register to be seen in the book.
Call the unfettered electronic market Orderbook, instead. And use the real-time capabilities of electronics to make deals work. Worried about whether you'll get the stocks you order when you order them? The fully electronic market will solve that with a delivery for payment mechanism. No delivery? No payment.
After all, what's there to deliver any more? There are no stock certificates. Just digital codes that represent stock certificates. There are no dollar bills. Just digital codes that act as currency.
So if you got 'em, you can deliver 'em. Instantly. No three-day settlement. Real-time settlement.
You wouldn't need a regulator to do due diligence on your counterparty. You'd do it yourself. Or hire a service for it. If you felt the need, you could buy insurance, in the electronic ecosystem that would spring up. Or work on margin, with a lender that would provide funds for your purchases and be responsible for collection.
Yes, there would be plenty of crooks trying to crack codes and intervene scurrilously in legitimate transactions. But financial system security is pretty tough and getting tougher. And the SEC has had little do with that. Who would replace the SEC's division of enforcement, investigating, charging and prosecuting the crooks?
The police and courts, in Harris' book. Stand out of the way. And give the SEC a new mandate. To supervise the transition. And its own disappearance.