Wealth Fund Cautions Against Costs Exacted by High-Speed Trading

Despite being one of the largest single investors in the world, Norway’s sovereign wealth fund rarely makes waves.

Now, though, the $750 billion fund is preparing to raise its voice on a sensitive topic: the increasing computerization of the stock markets and the costs it has imposed on big long-term investors.

Wall Street firms and exchanges have long said that the speed and competition in the markets has made trading cheaper for everyone. Mary Jo White, the chairwoman of the Securities and Exchange Commission, recently referred to the United States stock market as the “envy of the world.”

But the top trader at the Norwegian fund, Oyvind G. Schanke, said not enough was heard from long-term investors like the fund, which holds $110 billion in United States’ stocks, and the asset managers representing American retirement savers. For them, Mr. Schanke said, the benefits of the technological changes of the last few years are not nearly as clear, and the costs of the system are often left out of the discussion.

“The U.S. market has gone through a lot of changes and has become quite complicated â€" and this complexity of the market creates a lot of challenges for a large investor like us,” said Mr. Schanke, the global head of stock trading for the fund, Norges Bank Investment Management. The fund invests some of the country’s oil wealth for future public programs.

Compared with five years ago, he said, “We don’t see any evidence that it is cheaper for us to trade.”

Mr. Schanke said the debate had gone off track largely because most of the research had examined narrow metrics to determine whether things were improving.

The most popular way to gauge the cost of trading stocks is the so-called spread, the difference between the prices that investors are offering to buy and sell a stock at a given moment. Many studies have found that competition among high-speed traders has narrowed that gap, making it cheaper for investors to move in and out of stocks. Mr. Schanke said the spread had indeed diminished and that had helped reduce costs for small retail investors trading a few hundred shares with a discount broker. But retail investors are a small portion of total trading. For the large investors trading millions of shares, like the Norwegian fund, the spread is only a small part of the cost of trading. The much more significant cost comes when other traders spot a big investor coming and then push the price down or up, knowing the investor will have many more shares to buy or sell.

Mr. Schanke said that fragmentation of the markets had made that practice easier for high-speed traders, and that the cost of the so-called market impact was 5 to 10 times any other costs, he said.

“It has become much more a market trading for trading’s sake,” he said.

Mr. Schanke has a unique vantage point on the problem because his fund invests in markets around the world, allowing it to compare different systems. The fund owns about 1 percent of all American stocks and more than 3 percent of all European stocks. Mr. Schanke said that despite all the feverish innovation in the United States, the markets here were not superior to those in Europe, where there is less complexity.

The fund is planning to use its position to become more outspoken on the issues, particularly as Europe moves closer to the American model. It recently released a 28-page report detailing its concerns â€" and Mr. Schanke said the fund was planning to do more public studies and bring its concerns to regulators in Europe and the United States.

Several other big market players are also suggesting that regulators and industry players weigh a broader reconsideration of the market structure to protect confidence in the United States markets. Exchanges have been calling for rules that would make it harder for smaller platforms like dark pools. The banks that run the dark pools have pressed for an end to the rules that protect exchanges.

Regulators at the S.E.C. have resisted making significant reforms in recent years, but they are contemplating changes after several highly public technological breakdowns and concern about the dominant role played by high-speed trading firms, which now account for more than half of all trading.

At an industry event on market structure last Thursday, the acting director of trading and markets at the S.E.C., John Ramsay, talked about “the importance of questioning assumptions that have led to the system we have.”

“In looking at these questions, we are going to be open-minded and broad,” Mr. Ramsay said.

But many of the loudest voices in the debate disagree with the Norwegian fund’s assessment that investors have not realized any great benefits from the recent evolution of the market.

“This U.S. equity market continues to be the most efficient mechanism for pricing in the world,” Bill Baxter, the head of electronic trading for Fidelity Investments, said at the event on Thursday.

For his part, Mr. Schanke said many of the players arguing for the status quo were part of the enormous network of companies making money off the current structure and were not the investors actually holding the shares, or the companies issuing those shares. He said the current market had made it particularly hard to trade the shares of medium-size and smaller companies, the ones who most needed the markets to raise money.

“We should never forget why there is a market,” he said. “We seem to forget that in all the discussion about market structure.”

The Norwegian fund does not want to see a return to the 1990s, when stocks were still traded by humans on the floor of the New York Stock Exchange. According to the fund’s analysis, trading costs dropped sharply in the years before 2007 when trading first went electronic.

But many of the drastic changes in the markets have come about since 2007, when the S.E.C. passed a wide-ranging set of rules, the Regulation National Market System. Those rules encouraged the proliferation of new trading platforms. All the new platforms, in turn, gave an opening to high-speed traders, which used their speed to dart between exchanges, anticipating moves in prices. Mr. Schanke said it was those original rules that should be reconsidered.

“The regulations that were put in place have created a market that is too complex,” he said. “It would be beneficial to reduce the complexity in it.”