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    U.S. Securities and Exchange Commission building, Friday, June 19, 2015, in Washington

    SEC Bolsters US Financial Stability Via Cases on Options Markets

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    This outgoing week, the US Securities and Exchange Commission (SEC) made progress in its crackdown on insider trading, whilst also allowing larger options trading guarantees, stirring debate of unfair competition and a possible authority abuse in determining insider information cases.

    Kristian Rouz — Late this outgoing week, the US Securities and Exchange Commission (SEC), the principal financial regulative authority, took two measures, potentially strengthening the US financial stability via tougher market supervision. Albeit having drawn a significant amount of criticism from market participants and dubbed as ‘tightening of the screws', the recent SEC actions helped stave off some market volatility ahead of the nerve-wracking Federal Open Market Committee policy meeting.  On Friday, the SEC made a successful (for now) attempt at curbing insider trading in the US financial markets in a "Payton et al" lawsuit, while just the day before the watchdog approved further processing and guarantee all trading in options contracts by Options Clearing Corporation (OCC).

    On Thursday, the SEC discontinued its "automatic stay of delegated action" on the OCC plan to increase its capital. In other words, the watchdog allowed the options trading firewall to build up the scale of its operation to ensure a larger volumes of traded options contracts, thus safeguarding traders and investors from losses in case of a market meltdown.

    US options trading has become most prominent after the global financial meltdown of 2008. Options contracts trading, naturally being a highly volatile market tool, crashed during the last crisis, inflicting severe losses to many traders and investors, stirring a debate on whether it requires more regulation to ensure less harm during future crises. The Chicago-based Options Clearing Corp. (OCC), being a firewall of sorts, protecting options trading at the traders' cost, was founded back in the 1970s. The OCC covers the losses of parties involved in options trading when the primary initiator of the deal is unable to safeguard other parties interests from losses. However, the OCC scope of activities was relatively small until the recent SEC decision, allowing the firewall to increase its capital by $150 mln, drawn from the five bourses that own it: the Chicago Board Options Exchange, International Securities Exchange, Nasdaq OMX PHLX, NYSE Amex Options and NYSE Arca Options.

    The OCC capital thus should increase to some $247 mln.

    A positive development for market stability, however, has met harsh resistance from three options exchanges outside of OCC club of donors. These exchanges, namely, Bats Global Markets Inc., Miax Options and Box Options had claimed the bigger trading platforms are violating the principle of fair market competition by excluding them from OCC compensations plan. The objection, now de-facto overruled by the SEC, had gathered some support from other trading parties, like KCG Holdings Inc. and Susquehanna International Group LLP.

    That said, the SEC move provides an increased stability in options trading at a price of greater monopolization. Although the non-OCC objections will be further reviewed, for now it is a major win for the five biggest exchanges, while minor actors are doomed to wither as "too risky".

    In another case, Friday's intermediary court win for the SEC, the watchdog was allowed to proceed with its crackdown on insider trading. In the case known as ‘US Securities and Exchange Commission v. "Payton et al", heard at US District Court for the Southern District of New York, the SEC was granted the right to put to trial two US stockbrokers who used insider information in order to capitalize on market movements ahead of the $1.2 bln deal of IBM acquiring SPSS Inc back in 2009.

    The case details have been well publicized since, and this New York court decision creates a landmark precedent by allowing US authorities to take action against any action of market participants they consider speculative in terms of information sharing. Though being a yet another step to provide more sustainability of the US financial markets, the SEC's relentless drive toward a wider regulation has stirred concern among traders.

    Although regulative measures have proven necessary by the devastating aftereffects of the 2008 meltdown, as provided in the Dodd-Frank Act, in particular, an overt supervision might inflict a greater harm to the financial sector. As outlined above, while the positive effects of the SEC decision on options trading have produces some spillovers like the allegations of unfair competition, the insider trading precedent might trigger a full-blown witch-hunt. While capitalizing on insider information is absolutely a crime, there is a lot of controversy to the matter, like whether the prediction or technical analysis of market movements and reaction to certain events and policy decisions might be considered an illicit use of insider information. Any analysis is based upon collecting of information from various sources, some of which might be considered an "insider" in certain cases.

    That said, while the SEC is striving for a greater market stability by decreasing risks of going bankrupt for market participants, it might be simultaneously increasing the risk of going to prison for all parties involved. Whilst the administrative regulation makes a lot of use to the market indeed, the excessive control might trigger a harmful paranoia and inefficient mismanagement of financing via the endless opening of probes here and there.

    For now, both SEC moves will be further appealed and reviewed, possibly ensuring more transparency to the regulative process. However, the trend is set, the administered market stability is a likelier reality. But, in the end, what is ‘market' about such a stability?


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