Remember the good news last week when the SEC banned flash trading?
Well, Public Citizen just put up a new blog post explaining WTO trade rules and how these rules might lead to the WTO trade complaint case against the SEC. The WTO might claim banning high frequency trading (known as HFT) is a barrier to trade.
HFT would almost certainly fall under the definition at Annex’s 5(a)(x): “Trading for own account or for account of customers, whether on an exchange, in an over-the-counter market or otherwise.” Even if it didn’t, the list in the Annex is illustrative, not exhaustive.
And the Understanding compels countries that used it in scheduling their GATS financial services commitments (this includes the U.S., Nigeria, and most developed countries) to “permit its residents to purchase in the territory of any other Member the financial services indicated in” the above list, and also to “grant financial service suppliers of any other Member the right to establish or expand within its territory, including through the acquisition of existing enterprises, a commercial presence.” This is not just limited to the list above. These two “modes of delivery” are known as consumption abroad and commercial presence, and the U.S. headnote in its schedule of specific commitments specifically references the list that includes 5(a)(x).
Such broad guarantees for financial services providers clearly pose a threat to the regulation of recent financial innovations, like HFT. Thus, the SEC could potentially encounter difficulties in preventing Direct Edge, whose largest owner is the German-Swiss owned International Securities Exchange (ISE), from utilizing flash orders. Foreign organizations like the ISE stand to gain exorbitant amounts of money from the continued implementation of HFT and likely would oppose domestic regulation in the U.S., citing expectations of returns and deregulation doctrines embodied in these international agreements (similar versions of which are contained in other recent trade and investment agreements, like the proposed Korea and Panama FTAs.)
Might Direct Edge pressure its home countries to launch a WTO case? Certainly, the deregulation commitments under the Understanding remain substantial, in particular with respect to the standstill requirement noted above.
And, Article 2 of the GATS Annex on Financial Services – which restricts domestic prudential regulations to those that are not “used as a means of avoiding the Member’s commitments or obligations under the Agreement” – would appear to constitute an additional constraint.
Direct Edge is the 3rd largest exchange in the U.S., 31.5% owned by a German-Switzerland securities exchange.
Just when you think we might get somewhere in financial regulation, oops, here comes the WTO and their ability to override national regulations and interests.
Note, no one has filed a case with the WTO. Public Citizen is noting it's possible and it has happened in the past.