Last December, the Securities and Exchange Commission put forward four proposals for transforming the US market structure. These proposals encompass updates to Rule 605, which involves improvements in data disclosure for all market participants; adjustments to tick size and access fees; attainment of best performance; and increased competition for orders.Thank you for reading this post, don't forget to subscribe!
At the Financial Markets Quality Conference hosted by the Psaros Center for Financial Markets and Policy at Georgetown University on November 15, a panel convened to discuss these proposals.
During the panel discussion, Jim Engel, an associate professor of finance at the Georgetown University McDonough School of Business, expressed his concerns about the SEC’s proposed reforms, stating that there is a lack of coherence in how they are all interconnected. He added: “It’s really too much, too fast.”
Sapna Patel, head of Americas market structure and liquidity strategy at Morgan Stanley, concurred on the panel, emphasizing that the four SEC proposals are interdependent and cannot be considered in isolation.
“When you consider the fundamental changes that were envisaged, the question arises: What issue are we striving to address as our markets are already quite efficient?” she remarked. “I believe we need to exercise caution and reconsider disrupting a system that is functional for investors.”
Patel, who worked at the SEC during the last significant alteration in US market structure with the introduction of Reg NMS in 2005, highlighted the need for the regulator to engage with the industry, as it recognized that all its proposals were interconnected. The regulator held a public hearing for the industry and subsequently modified the proposed rules before gradually implementing them.
“Today, we have four independent proposals with no consideration for their mutual impact,” Patel observed.
Hope Jarkowski, General Counsel at the New York Stock Exchange, further expressed on the panel that there is widespread support for Rule 605, which would bring in transparency and best execution rules, but the other two proposals are contentious.
Jeffrey O’Connor, head of market structure, Americas at Liquidnet, reported in October that there is pervasive negativity surrounding offers from various industry sectors. He pointed out that during Gary Gensler’s tenure as SEC Chairman, there have been 47 resolutions, compared to 19 and 22 during the previous two administrations.
O’Connor remarked: “The current assertiveness is perplexing to most market participants, citing a lack of purpose or justification.”
enhance tick size
Jeffrey Davis, Senior Deputy General Manager at Nasdaq, noted on the panel that there seems to be a consensus on improving tick sizes and allowing half-penny tick sizes, which Nasdaq has long advocated.
“We have consistently maintained that this needs to be carried out gradually and cautiously,” he stated. “Our concern was that the proposal went too far and too quickly.”
Patel concurred that allowing tick sizes less than a penny addresses the market structure problem.
Davis continued that tick size reform is the sole proposal focusing on fortifying and broadening the NBBO (National Best Bid and Offer), which is crucial to all aspects of market performance.
tiered pricing based on volume
Another proposal that has stirred controversy is the prohibition of exchanges from offering tiered pricing based on trading volume for client flows, although this would be permissible for proprietary flows.
Patel indicated that the SEC appears to believe that brokers are engaging in antitrust behavior and steering the exchanges towards their own interests rather than those of their clients, and pocketing the money, while smaller brokers and exchanges are unable to compete. However, firms like Morgan Stanley provide fee discounts to their clients, and smaller broker-dealers, who are unable to become members in every location, utilize Morgan Stanley’s scale and connectivity for market access.
Davis argued that volume-based pricing is an universally recognized economic principle.
“This constitutes rational economic behavior and is among our best tools for establishing NBBOs by stimulating market participants to demonstrate liquidity,” he contended. “We are extremely concerned that we cannot compete on price with the off-exchange venues.”
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