good morning everybody. most american's image of the u.s. stock market is shaped by a single room. the trading floor of the new york stock exchange where traders await a ceremonial bell to kick off the day's activity and then trade shares worth millions on scraps of paper. in reality, most shares are traded not on a floor in manhattan but in racks of computer servers in new jerry. trades happen not at the speed of a human scribbling on paper but in the milliseconds it takes for an order owe travel through fiber optic cables. increasingly, the money made on stock markets comes not from thoroughly assessing companies for their investment potential but from exploiting little

advantages at unfathomable speeds earning billions off price differences measured in pennies. we're in the era of high speed trading. i am troubled as are many by some of its hall marks. it is an era of market instability as we saw in the 2010 flash crash. this subcommittee and senate banking committee shared in a hearing. it is an era in which stock market players by the right to locate their trading computers closer and closer to the computers of stock exchanges confirm a little speed advantage yielding massive products. it raises the question of whether much of what we call the market is in fact an illusion.

many, including this senator question whether the rise of high speed trading is overall a good thing for markets and investors. but without question, this era has seen a rise of conflicts of interest. these conflicts will be my focus today. other senators may focus on this or other aspects of high speed trading. new technology should not erase enduring values. financial markets cannot survive on technology alone. they require a much older concept, trust. trust is eroding. conflicts of interest damage investors in marketed. first by depriving investors of the certainty that their brokers are placing the interest of their clients first and foremost. second, by feeding a growing

belief that the markets are simply not fair. in fact, polling shows that roughly 2/3rds of americans believe the stock market unfairly benefits some at the exploitation of others. >> nearly after of americans own stocks or mutual funds who own stock or mutual funds. that lack of faith, if allowed to fester and grow, will undermine a very important public purpose of stock markets. to efficiently raise capital so businesses might grow. create new jobs and add to america's prosperity. in previous hearings and investigations, this subcommittee has shown that our financial markets have become

plagued by conflicts of interest. we have unkofred investment banks willing to create securities based on junk assets and then bet against those same securities, making a fortune at the expense of their clients. we have seen credit rating agencies assign artificially high ratings securities in order to keep or gain business. now, with that history in mind, those who argue that the conflicts we will explore at this hearing are manageable or acceptable have a nightly high burden proof. what seems to your average investor to be a simple trade is usually a complicated series of transactions involving multiple parties, complex technology and ever increasing order types and payment arrangements. there are retail brokers like the ones found in main street

offices across the country. there are whole sale brokers and there are doss of trading venues where shares are bought and sold. most americans know the new york stock exchange. there are now 11 public exchanging, including dark pools which are essentially private exchanges ran by financial institutions. as that complex structure has emerged, so have a number of conflicts of interest. i will focus on two. the first conflict occurs when a retail broker chooses a whole sale broker to execute trades. the second occurs when a broker acting on behalf of a retail client or an institutional investor which manages pension

funds if and retirement accounts. at both of these decision points, the party making the decision should only be influenced by it the best interest of the investor. that's what ethics demand. that's what the law requires. there's another factor in play. at both these, the current structure gives brokers an incentive to place their interests ahead the interest of the clients. here is now. the first conflict which is illustrated in that chart, occurs when retail brokers receive payments from whole sale brokers for their orders. this money, known as payment for order flow can add up to untold millions and almost every retail broker keeps these payments

rather than passing them onto clients. the reason they are willing to pay for order flow are complex. one big one is that whole sail broerks many can kibrokers. and profit from the trade. a process known as internalizing. the second is when a broker decides to use a public trading venue and then chooses which venue it will send orders to for execution. under what is known as the make or maker arrangement, there is an incentive for the broker to choose the trading venue based on the brokers financial interests rather than the clien clients'. maker taker can be complicated. here is a simplified explanation. when a broker makes an offer on

an exchange to buy or sell a stock at a certain price, the broker is classified as a maker. most exchanges will pay the broker a rebate when that offer to buy or sell is accepted. a broker who accepts a maker's offer to buy or sell is called a taker. it will generally pay a fee to the trading venue. the important thing to remember is that brokers, by maximizing and bay voiding taker fees and can add millions of dollars to their bottom line, giving them a powerful incentive to send the order to the trading venue that is in their best interest even if it is not in their clients' best interest. it is significant that earlier

this year. inspectlation that regulate yrs were considering restrictions f september some significantly lower. obviously there's a lot of money at stake in preserving these conflicts of interest. even if firms disclose these payments, disclosure does not excuse them from their legal and ethical obligations to clients. their legal obligation is to provide clients with what is known as best execution. whether they are meeting that obligation is a subjective judgment. the outcome of this subjective judgment affects the way 10s of millions of trades are executed. some who profit from these payments argue that seeking this revenue does not interfere with

their obligation to seek best execution. however, one of our witnesses today of the university of notre dame has done research kating that when given a choice four le four leading brokers send theirs to the markets offering rebates at every opportunity. the research further suggests that the exchanges offering the highest rebates do not in fact offer the best execution for clients. these brokers argue that they can pocket these rebates while still meeting their obligation to provide clients with best execution. so while they make a subjective judgment as to which trading venue provides best execution on

10s of millions of trades a year. that subjective judgment always just happens to also result in the biggest payment to brokers. i find it hard to believe that this is a coincidence. many market participants are worried about the conflicts of interest embedded in the current market structure. in addition to professor b batallio this panel will include bratly caugh bradley katsuyama. the second panel will include four witnesses, thomas farly whose corporate owners have

described them as having a corrosive impact on stock markets. joseph radermin of bats global markets which operates exchanges that compete with the new york stork ex-change and has a different way. the third witness on the second panel is joseph brenin of vanguard group. a major mutual fund company that has expressed concerns about these conflicts. the fourth witness in the second panel is steve quark of t.d.ameritrade. a retail broker that derives significant revenue from payment overflow and from rebates they receive from exchanges. the duty of lawmakers and financial regulators is to look out for the interests of investors and the wider public.

there is significant evident that these conflicts can damage repyrement savings, pension holdings and other investments under which americans rely. even americans without a single share of stock or mutual fund account have something at stake because stock marketed exist to foster growth and job creation. conflicts of interest jeopardize that vital function. americans don't shy from innovation or technology. indeed we embrace them. but americans are understandably suspicious when technology can be turned against them and their family's financial interest. they are rightly concerned when technology is used to undermine basic enduring principals such as trust and duty to a client. our goal is to advance the trust

of investors in our free marketed by promoting those enduring values. i wanted to thank senator mccain and his staff for his close cooperation in this matter as has always been the case in all matters. senator mccain. >> thank you very much chairman. i think this is a very important hearing. i appreciate the hard work that you and your excellent staff have done on it. i want to thank the witnesses for being here today. when michael lewis's book flash boys came out, the public knew very little about high frequency trading. important questions were raised. is the stock market rigged by high speed traders with faster access to market investigation. advanced technology and sophisticated algorithms. is it adding cost to other traders without contributing any

real value to the market. will stock markets face another flash crash like in 2010 when the dow jones tom pourarily lost $1 trillion in the matter of minutes. these concerns have fueled suspiciouses that wall street may have become the ultimate insiders game while the average investor can no longer participate. i wonder if the stock exchanges are still a place where their interests matter. hopefully this hearing will shed light on the trading practices used on wall street and help restore confident on the financial system. t while the problems facing the market are complex, we can

address them with a few common sense solutions. for example, one of the most predator high frequency trading practices depends on the unintended consequences of the secs regulatory national market system or regular mns. that mandates that investment firms must buy or sell stocks at the best price available. while that might sound like a reasonable requirement. high frequency trading firms can take advantage of the rule by putting out offers to buy or sell small amounts of stock at attractive prices. when a large investmentor seeking to make a big order accepts the high frequency trading firms offer because it's the best prize available, the high frequency trader can predict that he will have to go to another exchange to get the

rest of his order. the high frequency trader can race to the other exchanges. buy up all the shares and raise the price. changing nms so that they are no longer required to take the high frequency traders bate is the first step to cleaning up the high frequency trading practices. another key tactic is colocation. this practice involves trade firms. l receiving information as fast as possible. investors that don't buy this direct connection to the exchanges receive market data via a government established

system using out-of-date technology called the securities information processor that compiles market data much more slowly but as experts told the subcommittee there's no reason why public data feeds while the securities information processor can't be improved so thaer effectively as fast as private data feeds acquired through colocation. updating the feeds is another helpful measure that can be quickly adopted to sure up consumer confidence in the market. in addition to high frequency trading, flash boys also described how stock exchanges also pay rebates as senator levi nirks poi n pointed out. that rebates called maker taker payments create an apparent conflict of interest for the stock brokers who must choose between sending their client's orders to ex-changes offering a

high rebate or to exchanges that would fill the orders as quickly as possible. while many trading firms argue that those payments spur more markest activity, some experts argue that these benefits are minimal and that investors are harmed by their broker's conflict of interest. committee has found that there is a lack of data recording make or taker pay. s leading to difficulties in determining whether the payments have an adverse effect on the market. a logical first step would be to have more transparency in the payments allowing neutral researchers to study in greater detail. i hope that as a result of this hearing and the information that we will obtain from our expert witnesses that action will be taken to restore confidence which is clearly been eroded in

recent months especially since the publication of michael lewis he' book. i change mr. chairman. >> thank you mr. chairman. i also want to thank you for holding this hearing. very interesting getting prepared for it. both senator levin and makin' offered complex. there's no doubt what's happening in terms of trading is highly complex. from my standpoint having been an individual investor, i think the primary solution is in increases competition and transparency so we really understand what's happening. because it is complex it's difficult to fully understand. i'm hoping this hearing will really lay out the reality of the situation. as an individual investor who has bought stocks i used to have to pay hundreds of dollars to buy 100 shares of stocks. now i pay about $10.

so i real dlo hope that this hearing conveys what exactly is going on in the marketplace. what benefits have come to consumers over the years. what dangers may be out there but the bottom line is that this hearing should be about restoring confidence. it doesn't create it if we are trying to create a sense of fear. the best way to ensure confidence, the best way to ensure best price is through maximum competition and transparency of the marketplace. i'm hoping certainly this is what this hearing reveals. again, i want to thank all the witnesses. i'm looking forward to the testimony. >> thank you, senator johnson. >> i will now call your first panel of witnesses for this hearing. professor barks tbatallio and

bradley caught caughs katsuyama who's testify before the subcommittee are required to be swarn. do you swear that the testimony you're about to give before this subcommittee will be the truth, the whole truth and nothing but the truth so help you god? >> we will be using a timing system today. please be aware that one minute before the red light comes on, you will see the light change from green to yellow, giving you an opportunity to conclude your remarks. all of your written testimony will be printed in the record in its entirety and we would ask that you try to limit your oral

testimony to five minutes. professor batallio we will give with you. >> good morning chairman levin and ranking member mccain. it's an honor to have the opportunity to present my views on conflicts of interest. my expertise is the relationship between order flow endeucents and the quality of trade execution. before discussing my current research, i would like to provide a bit of context. orders used by retailer investors can be divided into two categories. investigators who want to trade quickly use market orders. investors who will willing to buy or sell stock but not at the prices that are currently prevailing in the marketplace use nonmarketable or standing orders to express their trading

interests. they do not immediately execute when they arrive in the market. exchanges use elect roironic bo to keep track of their orders and they typically use price time priority to determine it. the nonmarketable orders resting on the electronic books make or supply liquidity for anothers. a make rebate is paid to their investor or broker when they order trades. to fund the make rebates, the same use a take fee when they trade with nonmarketable orders. as a result of competition, exchanges also charge to do high take fees and those offering low rebates charge low take fees. it suggests marketable orders will tend to be first routed to venues that have low take fee and thus make rebates.

as a result, nonmaerktable orders on high fee, high rebate venues are likely to trade less. this suggests the likelihood that nonmarketable orders trade on the lowest. it states that brokers must take into account differences in the hikely hood of execution when determining where to route nonmarketable orders and that brokers but not allow endeucents to interfere the best execution. instead, they charge fixed commission rates that reflect, fees, rebates and other costs to doing business. thus while investors prefer to their order be routed to the venue offering the highest possibility of trade, a broker may have an inventive to route to the venue offering the

highest liquidity rebate. this alignment of incentives is hampered by an important agency problem. brokers that maximize rebate maze be able to charge lower commissions. if the investors choose it is because they lack the sophisticated information. it may be profit maximizing for their to focus on rebates rather than the likelihood of execution. unfortunately investors who's orders don't execute don't get the benefit. we present evidence from sev mandates rule 606 at four popular retail brokers route nonmarketable orders in a manner that's consistent with the goal of maximizing the rebates. they are from the fourth quarter of 2012 but subsequent rule 606

filings suggest these brokers have not significantly altered the their routing of nonmarketable orders. we next analyzed the relationship between make rebates and several measures of execution quality including the likelihood that and the conditions of which nonmarketable orders trade. our analysis find that nonmarketable orders are more like little to trade, trade faster and suffer less adverse selection than nonmarketable orders routed to venues with high make rebates. our results suggest that situations frequently arrive whether brokers decide whether to maximize the execution or maximize make rebates.

thanks for my opportunity to discuss this. >> thank you very much. mr. ca thank you for the opportunity to participate in this hearing and share our thoughts on issues effecting the u.s. equity markets. i am the president and ceo of ix group. since october of 2013 ix has been operating as an alternative trading system for u.s. equities. ix was founded on the premise of institutionalizing fairness in the market through the use of technology and by offering a balanced, simplified and transparent market model. we believe strongly in a market's responsibility to ensure just and equitable principals of trade as required by section 6 of the securities and exchange act of 1934. with that ix deliberately sought to build a platform that would eliminate conflicts of interest.

ix only has registered broker dealers as participants. as a result we have a very limited number of order types. we have instituted a time buffer that applies to all of our trading participants to neutralize inefficiencies that we've discovered. we use data fees from all the exchanges. it was the first its to publically publish our confident form its in an effort to provide transparnsy. it is important to recognize that it was created within the regulatory framework suggesting that it does allow for innovative free market solutions to emerge. >> participants can now trade less expensively and faster than they did in the past. we believe this was mainly due to the inevitable things that

technology has delivered across many industries with financial markets being no exception. it is apparent that the u.s. equity markets are far from perfect. these imperfections are the reasons we started ix and sitting here today. we believe that each having their own unique technology, products and pricing schedules creates a tremendous amount of complexity. the complexity combined with a lack of clear language disclosure has created unefficiency which allow advantages and disadvantages to various market participants. it has put the marvket at risk. there are forming conare flikts of interest that hi, would like to highlight. many high quality studies including the one from professor

batallio have demonstrated the relationship between a broker trying to harvest rebates and execution quality. second to avoid high fees many of the largest brokers created their own private dark pools to internalizing dark pool. while many of these broker pools are interconnected. at times, brokers are unwilling to route to other broker fields en even though it may be in the best interest of their client to so so. third, they seek to maximize profits by increasing trading volumes. as a result there are many predator high trading volume strategies as they are left unattended. fourth, markets that offer colocation and different speeds of market data and connectivity have a direct conflict in the profits garnered from selling

these service as versus the structural inefficiency while the same products enable a participant to trade faster than the market itself to the detriment who relies on a market to trade prices. the sec's website and ats reporting rule are recent positive steps. we would encourage further pursuits of transparency first standardization of data collection and reporting. second disclosure of routing and trading information in a standardized form between brokers and clients and third, disclosure of rules and services throughout all market centers. of the most important part is that it brings accountability to all participants in the market. this will allow the market to self regulate. we respectfully ask that if

congress or the commission looks to further modify the structure of the equity markets, careful consideration is given to decide which issues are better addressed through free market solutions. in closing ix would like to echo ix, that the secondary markets exist for public company. their interest must be paramo t paramount. as we work through these periods times, none of us should forget why the markets existed in the first place. thank you. >> thank you mr. katsuyama. we will have as many rounds as we need. that's true with both panels. we will have four votes that will begin at 11:00. i will stay here at least through the first two vote and miss those votes as currently planned and the others can come and make the votes should they wish. professor batallio, let's talk

about the nonmarketable orders. these are the ones that don't have an immediate match in the add or make lek wid iquidity. under the make or taker pricing, most exchanges are willing to pay brokers for sending them nonmarketable orders. so far -- >> yes, sir, very good. >> some retail brokers send virtually all nonmarketable orders to exchanges that pay a rebate is that correct. >> that also appears to be true. >> see if question get in a -- >> now, your paper -- your paper looked at where retail brokers routed nonmarketable customer orders and stated that

ameritrade, fidelity, scott trade, era trade routes orders a way that they may focused on liquidity rebates h. >> well, three of the four brokers either route things called -- the sec reports are not good enough to distinguish between marketable and nonmarketable limit orders. based on an assumption that is pretty solid three out of the four market pay who flow for flow or to the high fee venue. no where else. the venue is the exchanges. >> it's one venue offering the high make rebate. >> when it comes to over flow they go to the whole sale brokers is that correct. >> with the marketable stuff

they go. >> and they are paid for that? >> yes, sir. >> and they always go to the high high rebate exchange -- >> the one high fee -- >> for the nonmarketable one. >> yes, sir. >> now your paper assessed whether the decision by retail brokers to route nonmarketable customer orders to exchanges that pay the highest rebate was consistent with the brokers obligation to obtain best execution of their customers orders. this is now cuting from your paper quote, the results of our analysis suggest that's routing all nonmarketable orders to sani exchange that offers the highest liquidity rebate is inconsistent with maximizing naonmarketable

execution quality is that correct. >> the decision to use a single venue that offers the highest liquidity rebate does not appear to be consistent with the objective of obtaining best execution. am i quoting you correctly. >> yes, it results in a diminished filret. >> that is the reason but nonetheless, i quoted you accurately. >> exactly. >> is that evidence of a conflict that harms consumers. >> we certainly think that the routing could be done better, yes. >> well, to put it in terms that i understand. is that evidence of a conflict that would harm consumers. >> yes, sir. >> and your data then shows and your conclusion shows that highest rebate and best execution do not go together. yes, sir.

in some certains they don't go together. >> would that be in most circumstances where these orders are routed to an exchange. >> so in the most actively traded stocks where the lines to trade are the biggest of the that's where it matter the most gentleman that would . >> that would be true what i just said? >> yes. >> now, mr. caughtskatsuyama, i that some of the retail brokers that are named in professor batallio's paper who claim that the fact that they directed all of their nonmarketable orders that pays them the most is not inconsistent with providing the best execution for their customers. what's your view of that. >> so from a practitioner's standpoint. prior to iex i worked at a large broker dealer. first the exchange that pays the

highest rebate will have the longest cue because people who are hosting liquidity will wand the rebate. second thing to consider so getting in the longest line will lower your probability of getting filled because there are more people in front of you. the second thing to consider is the endeucement of the seller. where is the seller most likely to good when selling stock on the bid. the seller is most likely to go to the place that either pays them a fee or definitely attempt to avoid those who charge the highest fees. so getting in the longest line, posting in the highest rate venue. it makes you the least likely venue to get filled at because the seller is not inventivized to go first.

it works both ways. we've run a series of tests on this using our own capital back when i was at rbc and they confirmed the findings that the professor outlined in his paper. >> can you repeat that finding in your words? >> sure. that routing specifically with the goal of maximizing your rebate lowers the probability of getting filled and it leads to adverse execution quality -- worse execution quality for t. >> does that create a conflict of interest? >> yes. >> let me just go back to professor batallio for one moment. is best execution a subject of

determination at least in part? >> at least in part. we would argue more so subjective for market ordered because a lot goes into figuring out if you have a good price or not. standard order rs are a nasdaq order. we will certainly use that to see what best execution means for nonmarketable limits. fill rate is paramount. >> but is there also subjective factors in that determination for both? >> you're pushing the balance of what -- >> all right. you can't answer it. >> is there subjective factors in determining which market to go to for the ones for the orders which are non -- let me get the right word here.

nonmarketable? >> sure. at times there are for example if there are -- if you're establishing a new price meaning that you will be the only person on the bid, bidding on an exchange that pays a high rebate since you're the only person on the bid, it is justifiable. it makes sense. if you're joining a coupe that is very thick that has multiple exchanges represented and you choose to get in the end of the longest line. i would say that would be a conflict. >> are there subjective factors in that determination? >> yes. it's based on what is currently on the bid which would primarily be determined by the stock. so there are factors where a broker looking to get a rebate isn't necessarily in conflict with their duty to their client. so it's conditional, based on

the -- conditions of the stock -- based on what's happening in the stock, there are different decision points and there are times when you could we getting the highest rebate but also serving your client's interest. >> and there are times when that's not true. >> yes. >> thank you chairman. professor, i'm hearing terms adverse execution quality. dark pools. it all sound pretty sichbter. i wanting to to an example of a trade. let's talk about 100 shares at $20 just a retail consuper placing that with a broker. if you're using all of the online brokers it's costing you $2. you're buying $2,000 worth of stock. 20 years ago, i'd be paying two, 300 commission. if they are going into one of

these dark pools or arrangements, how much additional money could it cost the consumer if there's a conflict of interest if it's routed to a situation where there's a higher make or taker fee? >> so imagine, you have two orders to buy. one here, one here. this one is the high fee venue. only one trades. so they want to buy it. one will trade and the one rises to 20. which one trade snds ts? the one on the low fee venue. >> realistically when i put in a trade. i want to buy a stock. i've made a decision that this company is worth $20 a share and i put an order for $100 a share, goldman sachs have done studies. data is a big problem to do these types of analysis. so really get what you ask, we

need to have data that we don't have. so goldman sachs -- the claim would be that you lose three basis points, five basis points over the course of a day by making an unfair order routing. >> i'm talking about a retail investor like myself. i buy i am going pay $2,000 to buy the stock. i'm going to get that stock at $20 if i put an order that i say i want to buy that stock at $20, i get it at $20. >> no, it won't trade. >> so what do i do. >> you're going to cancel and chase the market up. that's the point. >> no. listen, i can't remember a trade that i haven't put it where i say i want to buy 100 shares at $20 where i don't put it at $20. >> so you're trading volatile stocks that don't have long queues. that's what most people do. >> the data --

>> i'm trying to get -- forget the price movement. let's talk about just the dollar value of this make or taker fee. on a $2,000 trade, how much is that make or taker fee on 100 shares of stock at $20. 30 cents per 100. the maximum is .30 cents per 00 th per 100. >> we're talking about this conflict of interest, the broker is going to push a trade into a make or taker arrangement where he gets .30 cents. what's the high range of this? .30 to .50? what is the range of pricing on this make or taker arrangement. negative 14 cents maybe to .32

cents per 100. so you got a maximum range of .40 cents so i'm i'm doing a $2,000 trade you're concerned about a conflict of interest where i might have to pay an additional .40 cents on a 2 trade. it's about the fact that you don't get to trade. >> your suassumption that you g to trade is wrong. >> how many times do people not get to trade. >> the difference is 25%. >> how much of that is the institutional investor and the high frequency trader versus the standard retail guy. i'm a very long term investor. i'm looking at a stock and i go, really, i think this thing is worth $20 and i will buy it at $20 but if not no harm to foul

so there are different investors. so when you're talking about .25 cent trades being executed that high volume or is it individuals like myself paying i want to buy $100 worth of shares. >> so is schwabb a retail broker. >> so let me ask you. how many trades into retail brokers like t.v.ameritrade don't get executed. we've asked for your data and they've never responded. >> where did you get your data, from a major bank. >> what's the data on. >> orders. they get routed to two vendors this. show up at the marketplace at the exact time time and then they watch what happened. >> i see they them reveal how

much they are taking. it sounds like $200 million. isn't it true that the market trades almost $27 trillion per year. what's in $200 million -- >> what we're here to speak to is the poor investor that wanted to buy it at 10 and didn't get to because the broker -- >> i'm trying to figure out how -- >> let me finish. >> i'm sorry. >> do you want to finish the answer? >> with better data, i could answer that. in our data set it can be as big as 25% difference in getting the trade done. >> i will just finish by saying what i'm concerned about is again just creating this sinister atmosphere of words like dark pool and conflict of interest in what we're talking about literally, i think is 30 or 40 cents on a $2,000 trade or

maybe a $3,000 trade. we're talking about minuscule amounts. what i'm look at is over time of investing, i've looked at my cost of a trade going from hundreds of dollars down to $10. i'm just trying to put it in perspective and try to figure out what the problem is. i guess we're talking about potentially government intervention which i might think have very harmful unintended consequences versus the free market system drive transparency, drive kpicompetit. from my standpoint it has gotten more transparent and a whole more cheaper. >> i'm not arguing with that. >> well, good. thank you, senator mccain. do you want to give a more el elaborate response do really this hearing doesn't matter

either you or or mr. katsuyama. >> to kind of respond to that. i think it's .30 cents and it's a $2,000 trade. i think that's the point. we're talking about conflicts that brokers are routing to get this .30 seconds. they can go on both sides. you can view it as trivial but you can do it why is the broker doing it in the first place if they are representing a 2,000 tray. even though the harm is diffuse, there are more retail investors invested in large pension funds or fut yumutual funds. i so think since it's a small

amount, it's a principal based argument. the other part on costs, costs have come down. of course they have. technology has delivered that cost reduction. there's a harvard business review study titled how to win a price war. it talked about electronic brokers are charging competitive terrain with their extraordinarily low broker services, the prevailing price has fallen from $30, to $8. that report was written in 2000. it is one where competitive force s agree that competitive forces should be setting prices. if everyone pays for an exchange rebate. if people are still incentivized to go after that rebate, i think when you look at pay ms.

it is something to say that there is a known conflict. it's not a reason just to ignore the issue. >> and with that increase in technology, hasn't that facilitated to a significant increase in volume of trades as well? >> so, you know, i think the fact that advances in technology have been harnessed by certain participants. i think that's part of free market competitive forces. i think that the challenge that the market was faced with -- i think one of the biggest confusions out there is that the person that buys and pays for these servers has an unfair advantage. >> actually, i think that's the key to this problem is that there are certain players that have made this a nonlevel

playing field whether it's .30 cents. >> sure. so in order for the person at home to get disadvantaged by the person who has spent all the money on high speed technology. in order for them to be disadvantaged they have to trade. that trade has to happen on a market. the market's responsibility is that knowing that different parties of technology but when the trade p happens that the condition that is done is fair meaning we have no buys is. the problem is that technology has evolved. the ex-clachange or the dark po the market itself should have advanced their own technology to ensure that we are building solutions with technology that maintained this fairness. the problem is that as marketed involved, people got in the business of selling technology.

people got in the business of enabling participants rather that's creating and maintaining their neutrality. when your participants understand the market, what's happening in the market faster than the market itself, that creates a pretty significant situation that we believe is unfair. >> well, sir. many commentators, including the editors of wall street journal have noted that regnms has enabled or exacerbated a number of predator, high frequency trading practices are. do you think that regnms should be reformed and if so, what would you recommend. >> sure. i think the spirit of regnms as was indicated makes sense. you have multiple competitive markets and you want to try to attempt to tie them all together. i think if you elimbate some of

the conflicts that brokers have invested in technology that can get around this issue of liquid wit. with had some problem in 2007 shall 2009. i think free market solutions can work together to address the issues. i think undoing it further run ts the risk of further unintended consequences. how due dress it. it is definitely something that warrants review. >> do you have any suggestions mr. batallio. >> do you do anything to regnms do it with a pilot study and study it very carefully. >> have you got other solutions to this issue. >> with regard to high frequency trading, that's not something i've extensively studied, no. >> mr. caughtskatsuyama michael

in his 60 minutes interview regarding his excellent book flash boys set that the stock market is rigged. is that an accurate description? >> so we've discovered that investors are systematically disadvantaged in the way the markets have been set up. i think rigged is a word that can be used to describe that. i think it is loaded. i think it describes -- the investment process is not broke ebb. rig what it did is give our critics and people who are apart of the prob almost a something to talk about somethingless which were a much more precise way to put it or a much more precise question which is the systematic disadvantages and how

they were kraeate created. so it was a distraction. the people who took most offense to that word was the people on the wall street. we have a tendency to talk to ourself on wall street but i think the response from the general public -- i guess the claim that we hurt investigator confident in the thing that's we've brought to light. everything we've seen would be the exact opposite of that and their reaction to what we've seen and done. >> on this issue of colocation, how do you address something like that? somebody represe somebody rents a place or computer. they are free to do that. that's america. how do you address that issue since colocation seems to be one

of the facilitating aspects of this whole system. >> yeah i don't thoi you can regulate colocation. if you say you can't sell space, cattage industries will pop up and throw cables over the fence. i think it's ef market's choice how they would like to set it up. we've put 350 seconds of latency between us and all of our customers. we have coiled 38 mills of cable in a data center. -- i understand what you've done but what is the remedy to this? >> i think the remedy is -- we keep harp ening on transparency and disclosure. i think there are distinctive -- >> it should be disclosed if

they are colocating. >> it should be disclosed but also things like anonymous listings of parpt ants on venue. does one participant represent 50% of my trade voluming. if they are an outsized portion of your overflow, that would indicate something. i think what the message rates across all participants are so much higher. i think we lack as the professor said, we lack the data. what we learned, we learned from experience. we learned from taublging in the industry. we lack the data. i think, again, the sec's website, the finer ats report, we learned a lot in basically two attempts to provide clearer understanding of what is happening in the market. we could learn so much more. the thing about colocation just discussing and advantages of

being five or ten micro second as way from a matching engine. you with bl. the number of high frequency traders was small. right now three. there are dozens and dozens of firms who have decided not to connect. i can't speculate as to why that is but clearly we've taken away something that they found are valuable. so it is every market choice to do something. it becomes a hard practice to regulate. i think with the increases transparency, people can make the decisions. >> you made reference to things like colocation. when it comes to best execution obligation, i gather that cannot be waived.

>> that's correct. best execution, it might need some further e refinement. i guess it's a pretty subjective term. i think it's used fairly liberally. one thing -- >> that is a legal obligation, is that correct. >> it is. >> so that's something that you can't disclose -- >> we don't engage in best execution in this firm. that does not fly, is that correct. >> that would not fly, no. >> would you agree with that, professor. >> going back to best execution -- did i interrupt you -- no. >> who determined best execution for a broker? is it a broker himself? >> the broker from my understanding is supposed to -- based on what i read monthly have meetings and just evaluate where they are routing. can it be done better. where should be alter things around the edges. >> but it's the broker who determined best execution. >> yes. >> okay.

now, i believe mr. katsuyama that you indicated that make or take system creates a conflict of interest. i think the testimony of both of you is that this is a significant matter. let me just add you mr. katsuyama should the make or taker system be eliminated? >> i think that steps should be taken to address what happens to the market if this is eliminated. i know a pilot study has been proposed. >> say that again. >> the pilot shouldy that has been proposed, i think it should have -- >> which eliminates it. >> which eliminates make or taker in certain stocks, i think it should be given the chance to prove that eliminating it shouldn't harm the quality of the markets. >> i think that steps should be taken and analyzed -- >> so at least that step ought to be taken. >> definitely.

>> professor. >> hiem not a risk taker. my view would be maybe not to eliminate make or taker because you might push it into soft dollar using. my goal would be to push disclosure back onto the broker. so it would be easier to tell. the sect a first step with this in 2000, 2001. we think you can do a better job with that now. >> would you support that test case that mr. katsuyama talked about. >> a pilot better than going all in. >> all right. some of have argued that the make or taker system is beneficial did you indicate mr. katsuyama that was technology

did that long before. >> yeah, i think decimalization and technology both contributed to the lowering of spreads. >> all right. now, in terms of -- does iex make a similar distinction that some high frequency trading may be predatory? >> so i think not all high frequency trading is predatory but some practices are. >> so do you make the distinction that some high frequency trading may be predatory. >> yes. >> and that may hurt other inves investo investors. >> has the proliferation of trading venues and order types created opportunities for predatory, high frequency traders to take advantage of investors? >> at times, yes. >> and what are those

opportunities? what kinds of opportunities? >> sure. so you know, i think given the structure -- a quick example is if there's 10,000 shares on offer to sell intel at $21 a share, you know a high frequency trading firm could be offering stock across multiple markets. one of those markets where they are offering stock might be what's called a taker maker venue that actually charges someone to post liquidity and will pay a rebate to the other side of the trade who comes to access that liquidity. so this endeucement, what it does is if a broker is going to follow that endeucement, it causes them to route orders and remove liquidity from intel in a very predictable and systematic way starting at the highest level of rebate for taking liquidity and working its way

down to charging the highest fee. this repredictable way of routing leads to the worst execution for the client. it's the combination of fast technology, inducements and the broker falling for those inducements. that would be a series of events . you have been quoted that people have lost confident that the markets are fair and working in their best interests. when charging a standard fee regardless of whether --