SEC commish: We need fewer lawyers and more economists

Troy Paredes says that economists have a better understanding of the effects of regulation than attorneys

Sep 24, 2009 @ 11:47 am

By Jed Horowitz

Securities and Exchange Commissioner Troy Paredes today called for the regulatory agency to hire more economists and fewer lawyers.

The SEC commissioner, 38, who was appointed in August 2008 by President George W. Bush, said that economists and industrial organization specialists who are grounded in the discipline of studying empirical data have a better understanding of the effects of regulation than most attorneys, who dominate the SEC's staff.

“We need more economists and other non-lawyers with a deep understanding of financial markets,” Mr. Paredes said during a speech at the Securities Industry and Financial Markets Association's annual Fixed Income Legal & Compliance Conference in New York. “When it comes to market structure, we can benefit from [people] with a deeper grounding in industrial organization .…To be so dominated by lawyers is ill-advised.”

The remarks of Mr. Paredes, a former law professor at Washington University with a law degree from Yale University, comes at a time when the SEC and its staff are suffering from low morale and criticism for dropping investigations of the now-convicted swindler Bernard Madoff. Morale also fell under the leadership of former SEC Chairman Christopher Cox, who undercut the ability of the commission's staff to negotiate enforcement actions.

Mr. Paredes' remarks came in his maiden speech to the securities industry's chief trade association. He repeatedly told the group of lawyers and fixed-income compliance specialists that regulations shouldn't be created without careful, data-determined cost-benefit analyses and that research, development and innovation in financial markets must be rewarded.

Despite the market cataclysm of the past year and the worldwide market structure problems caused in part by the unbridled use of securitized instruments, Mr. Paredes noted that too much regulation and legislation can have unintended consequences. He also said that popular ideas, such as the presumption that equity markets structures collapsed last year, need close examination.

“Market analysis must be grounded in data,” he said, noting that U.S. stock markets opened and closed every day during last year's market turmoil.

Although he was speaking to fixed-income specialists, Mr. Paredes focused his remarks on changes that the SEC is considering regarding equity market structures. Restrictions or outright bans of controversial trading practices —such as flash orders, dark-pool trading and high-frequency trading— could have harmful consequences, and the abuses may be overstated, he said,.

Flash trading, which allows some high-frequency traders in some trading systems to put in orders milliseconds ahead of others, actually occurs infrequently, and it is unclear how it affects securities markets, Mr. Paredes said.

“It is one thing to posit that a problem exists; it is another to demonstrate it empirically,” he said.

Mr. Paredes also took another laissez-faire stance on regulations by warning that risks in securities markets are unavoidable.

“When we regulate one risk, another pops up,” he said.

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