Occupy the SEC (“OSEC”) has submitted a letter to the Securities and Exchange Commission regarding that agency’s oversight over Exchange Traded Products (ETPs). OSEC argues that the ETP market, which currently constitutes over a quarter of U.S. equity trading by dollar value, is in dire need of enhanced regulation.
As it stands, the current ETP underwriting system unfairly privileges certain “Authorized Participants,” who are typically large financial institutions. The ETP market structure grants these privileged few an uneven first-mover advantage, all the while discouraging and eliminating competition. The ETP arena can best be described as an oligopoly, which concentrates risk and makes the market less efficient. Thus, OSEC argues, it is paramount that the SEC espouse policies that permit everyday, retail investors to compete on an equal footing with sophisticated ETP underwriters and other parties enjoying information advantages.
In granting past ETP exemptions, the SEC has regurgitated industry arguments that market-based arbitrage opportunities are sufficient to correct any discrepancies between ETP prices and underlying reference prices. In doing so, the agency has ignored two keys points. First, even where arbitrage successfully corrects price mismatches, it does so by creating unfair windfalls for savvy institutional investors who can capitalize on information asymmetries and operational advantages to extract value from the market. Second, it is not clear that arbitrage in the ETP market produces the stabilizing effects that the SEC presumes. In its letter, OSEC urges the SEC to implement a market structure for ETPs under which retail investors are placed on a level playing field with their more sophisticated competitors. OSEC also urges the Commission to enhance disclosure requirements, not dilute them, as these requirements are an important tool for tackling the fundamental lack of transparency that is inherent to the ETP market. ETP issuers and broker-dealers must not be awarded broad exemptions from long-standing regulatory requirements.
The proliferation of speculative activity caused the 2008 financial conflagration. Unless the SEC implements effective controls over ETPs, these securities are likely to serve as an accelerant for the next fire.