Earlier this month the Securities and Exchange Commission (SEC) released its semi-annual regulatory agenda listing its priorities at the proposed rule stage, final rule stage and long-term priorities. Besides being evident on the wide range of responsibilities our industry’s chief regulator has even during a time when tolerance for new regulations is low and unwinding existing ones is high, the agenda is a very good resource for identifying issues and subsequent events that have or will impact market structure. While it is too early to finalize a 2018 ‘Top 5’ list of events that effected market structure, our industry has experienced a lot this year and as we approach the halfway mark, now is a good time to reflect on some of these regulatory and non-regulatory events. Consistent with our approach we continue to work closely with Williams & Jensen and with our Committees to develop our thinking around these developments. We are actively engaged with The Hill, the Commission and FINRA, and seek your ideas and input.
Listed Options Market – Q1′ 2018 & February 5th Activity
A record amount of contracts – nearly 1.4 billion – were cleared in the first of quarter of 2018, and on Feb. 5 the U.S. stock market experienced its largest ever decline for a single trading day with the Cboe Volatility Index, VIX, closing at 37, up over 250%. The operational performance of the listed options markets on Feb. 5 was sound and impressive, with the volumes lending credence that the breadth of investors who find these instruments attractive has broadened. These combined factors should capture the attention of regulators and be a positive catalyst for addressing some of the industry’s concerns on such micro-market structure issues as: the calculation on risk weighted assets (RWAs), concentration of clearing brokers and market makers, fragmentation and potential overly burdensome costs associated with CAT.
Transaction Fee Pilot
At a March 14 open meeting, the SEC voted unanimously to propose a rule under Regulation NMS to “conduct a Transaction Fee Pilot
for NMS stocks to study the effects that transaction-based fees and rebates may have on…order routing behavior, execution quality, and market quality.” While it was no surprise that the SEC would propose such an action in the aftermath of the 2016 recommendation of the SEC Equity Market Structure Advisory Committee (EMSAC) to conduct a pilot, the amount of securities involved (3 buckets of 1,000 securities each) and a no-fee scenario caught some by surprise. The deadline for comment letters is later this month, but the impact of this event is already being felt as participants debate where the conflicts of interest rooted in transaction fees exist, and whether a lower fee cap coupled with proposed, but not yet implemented, order handling disclosures is a better option than an outright ban. Regardless, the proposed pilot is an example that, as markets evolve, unintended consequences appear. As recently noted by Liquidnet’s Adam Sussman, “the primary rationale for the access fee cap (in 2005) was to prevent market centers from abusing the protected quote status to extract high fees.” Today, it is more about conflicts of interest and the impact on routing customer order flow in an environment of never anticipated sub-penny commissions.
As recently noted by Liquidnet’s Adam Sussman, “the primary rationale for the access fee cap (in 2005) was to prevent market centers from abusing the protected quote status to extract high fees.” Today, it is more about conflicts of interest and the impact on routing customer order flow in an environment of never anticipated sub-penny commissions.
SEC Fixed Income Market Structure Advisory Committee (FIMSAC)
On April 9, at what was only its second meeting of the full FIMSAC, a recommendation for a pilot program
to “study the market implications of changing the reporting regime for block-size trades in corporate bonds” was approved and now is left to the SEC to determine next steps, if any. Regardless of whether the SEC moves forward or not, fixed income and FIMSAC’s work will be a priority for the SEC in 2018.
Equity Market Structure Symposium – SEC Chairman Jay Clayton Keynote
In their addresses and Q&A that followed at an April 10 event, SEC Chairman Jay Clayton and SEC Trading & Markets Division Director Brett Redfearn laid out the SEC’s agenda for equity market structure. After recognizing and giving support for the U.S. Treasury Department’s Capital Markets Report, Chairman Clayton stated the Commission’s specific equity market structure topics will be: market structure for thinly-traded securities, access to markets and market data, and regulatory approaches to addressing retail fraud as it pertains to digital assets and penny stocks. As a means to obtain industry feedback on these topics, the Commission will hold a series of Roundtables, each of which will garner much attention.
Roundtable on Thinly-Traded Securities; UTP Gets a Look and ETPs Get their Own Table
On April 23, the SEC held a roundtable with a wide range of industry participants to help determine if targeted changes should be made to optimize the market structure for thinly-traded securities. Following a recommendation in the U.S. Treasury Department’s Capital Markets Report that companies be allowed to forfeit Unlisted Trading Privileges (UTPs) thus providing them control on where their shares trade was debated in the context as to whether the liquidity challenges for these companies is “spatial” or “temporal.” Regarding Exchange-Traded Products, the SEC recognizes that this group may need a look given that 73% of the 2,100 listed ETPs trade less than 100,000 per day as compared to only 42% of non-ETP listings.
SEC’s full mid-year agenda can be found here