SEC mulls market structure reforms

“Today, as we move forward in the next phase of our efforts to enhance our market structure, I am recommending additional measures to further promote market stability and fairness, enhance market transparency and disclosures, and build more effective markets for smaller companies,” she said, adding that she’s also recommending the creation of a new advisory committee to review specific initiatives and rule proposals dealing with the market structure.

White stressed that overall market quality indicators suggest that the current structure is “not fundamentally broken, let alone rigged”. That said, she allowed that there are issues with the prevailing structure.

“Some potential additional benefits for investors from improved technology may have been diverted by excessive intermediation, and broad market quality would perhaps be even better if different rules were in place,” she noted. “And not all segments of the equity markets have equally shared the benefits from the positive market trends, and that disparity may have increased in recent years.”

To address some of these issues, White suggested that it is working on a number of proposals. For example, she said that SEC staff are developing recommendations for an anti-disruptive trading rule; a rule to clarify the status of unregistered active proprietary traders to subject them to the dealer rules; and, a rule eliminating an exception from [the Financial Industry Regulatory Authority (FINRA)] membership requirements for dealers that trade in off-exchange venues. It’s also working on recommendations for rules to improve firms’ risk management of trading algorithms and to enhance their regulatory oversight.

White said she is also asking the exchanges and FINRA to consider including a time stamp in the consolidated data feeds to help monitor the latency of those feeds; and, she’s asking the exchanges to develop proposed rule changes to disclose how they are using data feeds. “Brokers and investors could use the enhanced transparency to better assess the quality of an exchange’s execution and routing services,” she said.

The SEC will also consider whether measures are required that may limit the advantages of trading speed. While she said she’d be reluctant to impose a limit on trading speed, she suggested there may be room for other more flexible solutions that could be adopted by trading venues. “These could include frequent batch auctions or other mechanisms designed to minimize speed advantages,” she said. “They could also include affirmative or negative trading obligations for high-frequency trading firms that employ the fastest, most sophisticated trading tools.”

In terms of market fragmentation and the proliferation of dark pools, the SEC is working on a rule that would expand the reporting requirements for alternative trading systems, and it’s considering whether existing SEC rules, such as its trade-through rule has contributed to excessive fragmentation. “We also will be considering whether the current regulatory model for exchanges and other trading venues makes sense for today’s markets,” she said.

Order routing disclosure obligations may also get a boost, White said. And, she’s requesting that the exchanges review their order types and how they operate.

Finally, she said that it’s looking at issues of fairness for smaller companies, including possibly increasing tick sizes to facilitate trading in smaller issuers.

In response to her remarks, FINRA issued a statement indicating that it “strongly supports” her recommendations dealing with off-exchange trading. “It is important to the safety and of soundness of the markets that dealers that trade in off-exchange venues not be exempted from FINRA oversight,” it said; adding that it also supports expanding its ATS trading volume disclosure system to include all off-exchange venues.

“FINRA looks forward to working with the SEC on these important initiatives to ensure market integrity and protect the interests of the investing public,” it said.

“SIFMA has long called for a comprehensive review of equity market structure, and we welcome Chair White’s thoughtful remarks and look forward to reviewing the details of the SEC’s proposals,” said Kenneth Bentsen, Jr., president and CEO of the Securities Industry and Financial Markets Association (SIFMA), in response to the speech.

“Investor confidence in the fairness of the equity markets is essential to an efficient financial system that drives economic growth in our country. This is an extremely complex and important issue, and we agree with Chair White that any reform of the markets should be the result of a thoughtful, data-driven approach that relies on empirical data,” he added.