FINRA Chair Ketchum Discusses Importance of Research and Analysis on Capital Markets
FINRA CEO and Chair Rick Ketchum delivered remarks at the Conference on Market Fragmentation, Fragility and Fees, discussing ways to use analytics and research to evaluate the economic issues and inform regulatory decision-making relating to capital markets.
According to Mr. Ketchum, the industry is facing a "new regulatory paradigm – one informed by vast, expanding amounts of data and increasingly sophisticated analytics." He stated that it is essential to "bring to bear the power of math and its many forms" by using big data and well-constructed analytical methods to more efficiently and effectively monitor the markets and prevent investor harm. Mr. Ketchum explained that while FINRA has partnered with the academic community to use research effectively in many areas, through the Trade Reporting and Compliance Engine and other research initiatives, there are still opportunities for improvement.
One area Mr. Ketchum said deserves further academic study and analysis is market structure. He stated that FINRA supports SEC Chair White's recent recommendations to review market structure, specifically on the issue of enhancing transparency and oversight of "dark pools." Mr. Ketchum mentioned that FINRA is increasing efforts in this vein, such as beginning to issue reports on a stock-by-stock basis to increase transparency in Alternative Trading Systems.
Mr. Ketchum explained that another area calling for further research is broker-dealer finance and capital requirements. Specifically, Mr. Ketchum said that it is important to answer complicated questions regarding broker-dealer use of repos and other short-term wholesale funding through "balance economic research," since the reliance of broker-dealers on short-term repo funding is a key point of vulnerability. He explained that the research should look more closely at (i) "run" risks that exist with short-term financing mismatches, (ii) risks of market illiquidity, (iii) the capacity of alternative providers to supply liquidity, and (iv) developing measures that are "leading indicators" of liquidity issues. According to Mr. Ketchum, "we need to be careful that in addressing the problem of mismatched short-term wholesale funding, we're not inadvertently creating another."
Other areas Mr. Ketchum named as "ripe for analysis" included fixed income market structure and trading issues, as well as cross-product strategies. According to Mr. Ketchum, regulators and academics should continue to work together to perform appropriate research to inform decisions and ensure that the markets work efficiently.
See: Mr. Ketchum's Speech.