PR OFILE
Introducing Gregg Berman, EY Regulatory Guru RiskMetrics entrepreneur turned SEC regulator hired by EY HAMLIN LOVELL
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n September 2015, EY hired RiskMetrics co- founder Gregg Berman a few months after his five years’ spell at the SEC. Berman had joined
the US regulator in 2009 as part of SEC Chairwoman The Hon. Mary Schapiro’s initiative to bring in more people with industry, information technology and data analytics experience; Schapiro’s successor, Elisse Walter, and now current SEC Chair Mary Jo White continue to emphasise the importance of technology for uses such as analysing ‘Big Data’. Pre-crisis it had been unusual for the SEC to hire an entrepreneur, and would have seemed even more atypical as Princeton Physics PhD Berman was not a lawyer, economist or accountant. But Berman explains how “there has been a huge influx of different types of people with industry experience”.
He started in the SEC’s newly formed division of Risk, Strategy, and Financial Innovation; moved on to policy in the Division of Trading and Markets; and ended up as an Associate Director forming a new Office of Analytics and Research. Under the auspices of that new office, Berman implemented a new commission-wide system, dubbed the Market Information Data Analytics System (MIDAS), used to collect, process, and ultimately share with the public, analyses of billions of trade and order data records from our public equity exchanges.
Berman, who worked with some of the world’s largest asset managers at RiskMetrics, expanded this dialogue at the SEC and has many memories of his interactions with the industry. “We spent much time meeting hedge funds, banks and broker dealers to develop more informed rules. The big surprise for me was meeting with firms who were publicly advocating for additional rules and regulations,” according to Berman. During his time at the SEC Berman developed experience in securities regulation, market microstructure and market liquidity. Berman shared with THFJ some thoughts on latency, flash crashes, the new Regulation SCI, market liquidity, SEC proposals for mutual funds’ liquidity risk management and the rebates debate; just a small selection of the areas he advises on.
Equity Market Structure Berman did not enter public service in Washington, DC expecting a quiet life. Just months after he joined, the ‘flash crash’ of May 2010 erupted, an analysis of which highlighted the growing complexities and interconnectedness of an increasingly electronic marketplace. “Topics such as automated algorithms, system integrity, high-speed data feeds, and general market microstructure were suddenly thrown into the limelight.” Since the flash crash of 2010, the SEC and the exchanges have adopted numerous rules and safeguards based, in part, on a joint analysis of the event by the SEC and CFTC. “Many rules and regulations
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try to mitigate the circumstances that can lead to such highly disruptive trading. For instance, one aspect of the ‘naked access rule’, which had been imminent before the flash crash and was subsequently adopted by an SEC vote five months after in November 2010, prohibits broker-dealers from providing their customers, which can include high-frequency traders, hedge funds, or even manual traders, direct and unmonitored access to the exchanges.
“As an EY Principal, Berman is now bringing to bear the experience he acquired at the SEC, and finds his hands-on work is invaluable for advising EY clients.”
Flash Crashes of 2010 and 2015 That first ‘flash crash’ was one factor encouraging the SEC to continue its analyses of modern market structure, including practices such as high-frequency trading (HFT), in more depth. HFT is widely used in the foreign exchange, derivatives, futures, equities and Treasury markets. Additionally, “tools and techniques associated with HFT are ubiquitous. Everybody, including individuals, places and cancels orders, and trades electronically through systems that use complex routing techniques, algorithms, and advanced data feeds” explains Berman. Indeed, all of these activities can be part of trading at any frequency.
Berman thinks it is important for market participants to draw comparisons between the flash crash of August 24th, 2015, and the May 6th, 2010 flash crash, which was the subject of a (relatively short at 83 pages!) joint SEC/CFTC report in October 2010. No public report has yet been issued on the 2015 crash, but already similarities and differences are apparent. A persistent problem is that many exchange traded products, including ETFs, deviated far from fair value, just as they did in May 2010. Berman thinks that “when market makers find market conditions lead them to suddenly widen spreads or reduce their provisions of liquidity, it’s probably not the best time for ordinary investors to be trading”. There are now renewed calls for rules to ensure ETFs better reflect their constituent values, and the SEC in February 2015 set up an Equity Market Structure Advisory Committee (EMSAC), made up of market participants, academics and regulators, to discuss elements of market microstructure. But one difference between the 2010 and 2015 flash crashes was that “the link back to futures was not present this time as it was largely about individual stocks” observes Berman. Futures are regulated by the CFTC, which is, like the SEC, focused on identifying nefarious behaviour by traders, whether or not they are of the high- frequency variety. The landmark spoofing case against Michael Coscia in October 2015 concerned markets under the CFTC’s watch but ended up as a Federal criminal case, as are the Department of Justice’s charges against UK national day trader Navinder Sarao in relation to the 2010 flash crash.
EY & Regulation SCI So far these cases have involved a small firm and an individual, perhaps because “the largest firms generally know the rules” thinks Berman, but he worries that some people in the financial industry “may not be fully educated on all of the rules and their nuances, and thus do not understand the resulting consequences of their actions.”. Yet even those who are conversant with regulations can be wrong footed by unintended consequences. Just as chaos theory posits that a butterfly could cause a thunderstorm, so, too, the smallest changes in one area can have huge ripple effects- “When firms are running multiple systems at the same time, changes to some systems can interact with other systems to generate a bad outcome, which might be a violation” cautions Berman. “Firms need to constantly re-assess systems and strategies” he advises.
As an EY Principal, Berman is now bringing to bear the experience he acquired at the SEC, and finds his hands-on work is invaluable for advising EY clients, including banks, asset managers, hedge funds, broker-dealers, market exchanges and venues, and other financial service providers. “I worked on
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