Exchanges’ Dual Mandates Ripe for Review, SEC’s Jackson Says

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By Evan Weinberger

Securities exchanges’ split roles of serving as a quasi-regulator while maximizing profits may not be the best way to protect investors and should be reviewed, SEC Commissioner Robert Jackson said June 27.

The exchanges’ legal mandate to maximize profits even as they operate as self-regulatory organizations sets up a conflict where investor protection could be sacrificed for financial gain, Jackson, one of the commission’s two newest members, said at advocacy group Healthy Markets’ Healthy Market Structure Conference in New York.

“For me, my concern is that the self-regulatory organization structure, when merged with a profit-making entity, just may not be compatible,” he said. “It may not be a structure that works.”

Mixed Missions

Jackson pointed to the lack of clarity on pricing for transactions, and the way those prices are set, as examples where the two missions could come into conflict.

“Is it surprising that you see pricing dynamics that you don’t love on their services? It is not. Those are the incentives that we’ve given them in this structure,” Jackson said.

One issue that stood out for Jackson was the limits to exchanges’ liability for activity on their platforms, which the exchanges are mandated to police. Those limits are approved by the Securities and Exchange Commission, and make potential bad actions on the exchanges a certainty, he said.

“One thing that’s hard for me about that is, as a basic matter of economics, if you give somebody that kind of insurance from wrongdoing, you can expect a socially suboptimal level of wrongdoing,” Jackson said.

Other areas where Jackson said the dual role of policing securities markets and maximizing profits could collide include the sale of market data and other information, he said.

Change on the Margins?

But Jackson did not advocate blowing up the system as it exists.

Markets have become accustomed to the way the exchanges operate, and making rapid, sweeping changes could unsettle a system that needs certainty, Jackson said.

Change may be necessary to better protect investors and improve market operations, he said.

“We can talk about that in an incrementalist fashion, and I’m for that because we have a market that’s based on the model that we have and I don’t want to do too much upsetting of apple carts,” Jackson said.

Jackson recommended examining the way exchange committees operate, and the way they interact with exchange management, as well as improving pricing disclosures.

Jackson said any question the SEC and the market asks about exchanges must come down to one fundamental inquiry: Does the current structure best protect investors?

“If we put them in the position where they’re half-regulatory but also made to maximize profits, is that the situation that is the best for investors? And I’m not at all convinced that it is,” Jackson said.

To contact the reporter on this story: Evan Weinberger in New York at

To contact the editor responsible for this story: Michael Ferullo at

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