Tags: Market Data

In Episode 4, we sat down with former SEC Commissioner Troy Paredes of Paredes Strategies LLC. We covered AI, recent developments at the SEC, insights on how to track those issues you care about post-Presidential election and Troy’s bi-monthly podcast Appetite for Disruption, which discusses the business and regulation of fintech.

The history of the relationship between the SEC and STA is a long one.  Both organizations were formed at a pivotal time in the nation’s economic history.

The Securities Act had become law and the Securities and Exchange Commission was formed to regulate the issuance and sale of corporate securities to investors and bolster public confidence in the stock market.

STA was born in the Windy City of Chicago, when local industry professionals invited security traders across the Midwest to join them at their inaugural outing where bylaws were drafted and elections held.

That was August 21, 1934 and while the guiding principle identified back then remain core to STA today it has been the hundreds of individual relationships between SEC Commissioners and STA Chairs that in combination have enabled it to strive.

One such example, is former Commissioner Troy Paredes who after being appointed by President George W. Bush went on to serve at the Commission from August 2008 to August 2013. Commissioner Paredes, like so many of his fellow commissioners, always kept an open-door for STA.

As always, Commissioner Paredes provided awesome insights and well informed opinions. Enjoy the Listen.

Open Call – New Consolidated Market Data Plan

STA Open Call – January 23, 2020 – Call Notes[1]

New Consolidated Market Data Plan (“Proposed Order”)

Mike Masone, Citi

Nat Evarts, SSGA

Opening Remarks – Jim Toes, STA

STA Comment Letter on Rule 15c2-11

STA commends the Commission for proposing amendments to modernize Rule 15c2-11 STA offers the following comments about certain aspects of the Proposal, including: (1) the increased burden that may be imposed on market makers; and (2) potential consequences for retail investors when securities are no longer eligible for public quoting. Full letter here

SEC Discussion Document used on recent SEC Meetings

In late Dec. STA conducted meetings at the SEC which included: Commissioners Elad Roisman and Alison Lee. Issues discussed included: Proliferation of strikes in the options market place; implementation of Rule 606; Thinly Traded Securities & others. Complete list & comments here. 

Executive Summary

On Jan 8th the SEC announced it will seek public comments on a proposed order that will modernize the governance of National Market System (NMS) plans by among other things, unifying the three existing plans into one. As we will discuss tonight, we believe this is a significant development. While technology is often credited with being the major influence on the evolution and overall efficiency of our markets, data is the fuel which feeds it. The goals this evening are: raise awareness; educate and most importantly inspire engagement during this window in time when determinations on what defines the new Plan are made.  

Questions & Answers (not covered in the Open Call Material pdf)

Question: Please provide perspective on where market data is today &  Jan 8th announcement The growth, increased speed and development of new and sophisticated trading protocols inherently fed the need to have access to, and consumption of, a wider and more nuanced data set. Through the years, improvements have been made in the consolidation & dissemination of market data (SIPs), but those improvements have not kept pace with the alternatives the industry can and often must access.

The existing governance structure of the SIP Reg NMS Plan was designed in 1975. Markets and the corporate structure of SROs have changed dramatically since that time. Current governance holds little transparency and does not accurately reflect the diverse cross-section of market participants transacting in it. Consolidated market data is now something that needs to be looked at and the SEC is taking the right first step by seeking comments on a new governance structure 

STA Open Call Market Data FINAL Report with Call Material HERE

[1] This brief is meant for informational purposes only and therefore should not be considered legal advice. STA’s goal is to raise awareness on industry developments and encourage dialogue.

The SEC's Meeting on Market Data

Tomorrow, Jan. 8, the Securities and Exchange Commission will consider whether to issue for public comment a proposed order that “would require the SROs to propose a single, new NMS plan that would increase transparency and address inefficiencies, conflicts of interest and other issues presented by the current governance structure of the three NMS plans that govern the public dissemination of real-time, consolidated equity market data for NMS stocks.” Details on the proposal are not yet known; however, there is already public debate as to whether another, albeit new, NMS plan is the best path towards resolving the highly contentious issues associated with the quality and cost of market data. While the Commissioners have not yet voted, there is speculation that some will oppose this strategy and express a preferred course of action that involves direct SEC rule-making.

This is not the first time the Commission has had to make a decision on which process to follow for implementing new rules. Unfortunately for the industry, our ability to provide comments on such a decision is limited; that is, we do not have enough information nor a set of criteria needed to make an educated recommendation. This is why we believe that opinions that strongly favor one approach over the other at this early stage are premature. It’s the equivalent to saying a hammer is better than a screwdriver for putting two pieces of wood together without knowing if you have a nail or a screw to complete the task.

Rulemaking and NMS Plans

Rules governing the securities markets today are introduced to the marketplace by either SEC initiatives in the form of direct SEC rule proposals, or rule filings of the SROs either independently or under the direction of the SEC and executed via an NMS plan. While there are similarities in these processes, they are distinct and possess different challenges and efficiencies. The conflicted nature in the governance of NMS plans – specifically concerns that the for-profit entities responsible for designing, implementing and maintaining them will act in their own best interests to the detriment of other market participants, are bona fide. On the other hand, while SEC direct rule making carries fewer conflicts of interest, the amounts of data required for this process has overwhelmed industry participants to the point where the efficiency of this approach has its doubters as well. Results from these two processes over the past decade have been mixed and therefore inconclusive that one is better than the other in any or all circumstances. Both have their flaws and benefits.

In June 2012, STA testified before a House Financial Services Subcommittee on the two processes available to the Commission for introducing rules into the marketplace. We acknowledged then, as we are doing today, that there are efficiencies within both processes which when applied properly can serve the competitive nature of our markets and investor confidence. However, we also stated,
“Our concerns reside in the lack of criteria that are used in deciding which process better serves investor confidence when rules are proposed.”

Even in situations where the Commission is in complete agreement on the goals of a piece of regulation, there is no clear criterion for the best process to introduce it. This void, which remains today, coupled with a lack of details on the Commission’s new proposal, make it extremely difficult for the industry to provide meaningful input.

Neither process is perfect, but both can produce meaningful improvements if executed with transparency into the process and with industry input. We must be confident that both options were considered by the Commission and acknowledge that compromises were likely made to arrive at solutions that can garner sufficient votes to pass.

Managing or Eliminating Conflicts of Interest

Concerns about conflicts of interest arise repeatedly in financial markets. Often they are met with calls to eliminate or mitigate the source of conflict to reduce any potential harm. Generally speaking, STA has always taken a more balanced approach in the presence of conflicts of interest, choosing to find the means to manage them through better transparency and disclosures brought about by competitive or regulatory catalysts. In September 2017, when STA expressed our increasing concern with the Reg NMS Plan process and its impact on investors, including the timeliness and efficacy of such plans, we chose to recommend reforms as opposed to eliminating all or any single plan. We wrote:
“STA believes conflicts between SRO and non-SRO participants, who are essential for a successful NMS Plan outcome, play a role in the shortfalls of these Plans. We believe reforms are needed that address these conflicts, and that such reforms should be guided by improving investors’ interests.”

In our conversations with regulators, one opinion we often get challenged on is that investors can be better off dealing in a regime with conflicted parties when the conflict-free alternative is inferior. This is not to say that conflicts should be overlooked, let alone encouraged; rather, we recommend that regulators consider whether the regime created by a conflict-free process is superior or inferior to one where conflicts exists. Banning a process because conflicts — even meaningful ones —exist, is not a sound practice. 

Therefore, while we recognize the inherent conflicts in NMS plans and that the stakes involving market data are high, we are hesitant to dismiss an NMS plan solution at this point without knowing what the Commission is charging the SROs to deliver in it newest proposal. 

A Good Step

In the absence details on the Commission’s new proposal and the lack of criteria for making a decision on which course of action to take, the question then begs, what does our industry do today and in the immediate days following tomorrow’s decision?

I believe our best response is to respect whatever decision that the Commission makes regarding process and then provide the much needed input to best ensure it achieves its intended goals. Neither process is perfect, but both can produce meaningful improvements if executed with transparency into the process and with industry input. We must be confident that both options were considered by the Commission and acknowledge that compromises were likely made to arrive at solutions that can garner sufficient votes to pass. We need to be satisfied that some progress in the public dissemination of real-time, consolidated equity market data is better than no progress at all and that we should not allow the perfect to be the enemy of the good.

We look forward to tomorrow’s decision and providing the Commission with industry input on how to move forward. 

Treasury Executive Session

Treasury Executive Session

On Thurs., May 30, U.S. Treasury Secretary Steven T. Mnuchin convened a closed-door meeting of the Financial Stability Oversight Council (Council) in executive session at the U.S. Department of the Treasury (Treasury). In addition to other topics, the Council heard a presentation from SEC staff on several topics related to equity market structure. The presentation addressed issues including market volatility, securities exchanges’ “maker-taker” pricing model, and market data and access. Minutes and the SEC report are not yet publicly available.

SEC announces agenda for FinTech Forum

In Nov. 2018, the SEC announced the formation of its Strategic Hub for Innovation and Financial Technology, SEC FinHub. Among the goals or purposes of the FinHub is to enable the SEC to actively engage with innovators, developers and entrepreneurs. SEC Staff and FinHub is hosting a 2019 FinTech Forum on Fri., May 31, beginning at 9:30 a.m. ET. The forum will feature four panels. Click More for agenda and speaker list.

Ms. Allison Lee, Nominee for SEC Commissioner

The Senate Banking Committee will meet in Open Session on Wed., June 5 at 10:00 a.m. ET to conduct a hearing on several nominations. One of which is Allison Lee of Colorado, who is nominated for SEC Commissioner. Assuming Ms. Lee is approved by the Committee, a full Senate would be the next and final step towards an appointment.

New SEC Guidance on Market Data Fee Filings

This guidance discusses several aspects of Fee Filings, with a focus on how SRO’s can ensure that they have clearly described their proposed fees and addressed how they satisfy Exchange Act requirements that, among other things, fees be (i) reasonable, (ii) equitably allocated, (iii) not unfairly discriminatory, and (iv) not an undue burden on competition. 

Read STA May Newsletter here 

Talking Points – March 2019

Discussion Document – March 2019

Who We Are
STA is comprised of 24 affiliate organizations covering the entire US and Canada. The STA national board of governors is comprised of past presidents and industry specific leaders. Our membership represents INDIVIDUALS from varying business models – buy-side, sell-side, hedge funds, exchange traders and market makers- dealing in equity and derivative trading

SEC Rule 606 – Requests for Guidance
*As with any large scale industry project, regulatory guidance prior to implementation is often needed. As the May 20th compliance date approaches the industry seeks SEC guidance on a range of areas, including but not limited to: options calculations & reporting on amended 606(a); definition of actionable IOIs under amended Rule 606; challenges for introducing BDs.

SEC Transaction Fee Pilot for NMS Securities – Spreads and Canadian Securities Administrator
*STA believes that the impact access fees have on our market structure has evolved since they were originally allowed and then capped. We therefore support a study that includes a pilot.
*STA also appreciates that the Commission, in its final decision, responded to remarks in STA’s letter which recommended reducing the number of securities in the pilot as a means to provide protections in the event that the pilot widens spreads in securities, and coordinating efforts with the Canadian Securities Administrator.

SEC no-action letter under the Investment Advisers Act of 1940 on MiFID II
*STA believes that a meaningful number of market participants anticipate the Commission granting an extension and/or expansion on the existing “no-action” relief. A decision to allow the relief to expire in July 2020 risks to be highly disruptive if firms are not provided adequate time to adjust to the regulatory regime.
*Expiration would have a particular impact on those broker-dealers who may decide to register their research departments as investment advisers to accommodate cash payments. *Additionally, we believe that the demands on SEC resources to process an initial influx of RIA registrations and to facilitate ongoing audit and supervision reporting would be meaningful.

FINRA Working Paper: High Broker-Affiliated ATS Order Routing Associated with Lower Fill Rates, Higher Costs
*STA looks forward to being a conduit for industry input until the paper takes it final form.

Exchange Traded Products (ETPs)
*In 2018 STA established an ETF Working Group partially in response to ETF participants’ willingness and desire to be part of larger and broader equity market structure conversations.
*Some initial areas of focus include: Allowing flexibility on creation/redemption unit sizes and SEC’s Transaction Fee Pilot;
*Proposed New Rule 6c-11 (ETF Rule) – Updates and Discussion
• Disclosure of Bid-Ask Spread Information
• Canadian “ETF Facts” Disclosure Requirements

Thinly Traded Securities – UTP
*It remains STA’s view that shareholders of small to mid-size securities which lack a robust secondary market benefit from the presence of market makers and block traders who can, among other things, provide enhanced liquidity to increase the depth of the market. While the factors in enhanced liquidity provision are numerous, there are certain core ones which include: quote quality; volatility; and reduction in costs.
*While STA understands and appreciates that the goal of suspending UTP is to enable “innovative market structure solutions” we still have concerns regarding a venture or thinly traded exchange regime which allows for the suspension of UTP as part of its construct.

Market Data & Market Access: Core Data – Order Protection Rule (OPR) & Best Execution
*STA looks forward to engaging the SEC as it reviews Regulation NMS. While we do not call for a wholesale revision or rollback, we believe there are certain areas which need to be revisited for their effectiveness in today’s market structure.
*STA is currently reviewing its opinion of the OPR which was last expressed in our May 2008 Special Report:
“STA is of the opinion that a marketplace without this order protection rule will be superior to enforcing the current OPR… While the OPR was well intended, its many complex exemptions complicate compliance and dilute its effectiveness… The STA believes that the elimination of the OPR contained in Regulation NMS will allow for superior executions and will positively impact displayed liquidity.”

Combatting Retail Fraud – Rule 15c2-11
*The SEC has explored eliminating the piggyback exemption and requiring broker-dealers to periodically update 15c2-11 materials (proposals in 1991, 1998 and 1999).
*Costs to broker dealers to maintain 15c2-11 materials are meaningful and the inability to recoup them (FINRA Rule 6432) disincentivizes broker-dealers from providing public pricing and liquidity services, ultimately resulting in less, not more, public information available about small cap issuers.

  • There are workable solutions to achieve the underlying purpose of the rule: to prevent and deter microcap fraud, particularly involving issuers for which public information is limited.
    • Rule 15c2-11 materials should be made public and issuers should be liable for any misrepresentations contained in these materials.
    • Trading venues that make that information publicly available, and indicate when the information is current, should be permitted to file Form 211 with FINRA.
    • For securities of issuers that have not made current information available for a defined period of time, the SEC may want to explore limiting trading to sophisticated investors with a high risk tolerance.

PDF version here

Open Call Report – Preview on SEC Market Data & Access Roundtable

SEC Chairman Jay Clayton Speech  – In April 10, ‘18 speech, SEC Clayton committed to conducting roundtables on the three areas of focus in equity market structure for the Commission: address the challenges associated with liquidity for thinly-traded securities; regulatory approaches to addressing retail fraud; and access to markets & market data

Roundtable Agenda – On October 25 & 26th the SEC will hold a Roundtable on market data and market access that includes 7 panels & 48 presenters w/ discussion generally divided by market data products/services provided by SIPs & those by exchanges (Direct Feeds) LINK

Issues Discussed: Transparency: into the costs to produce the SIP and Direct Feeds and revenues generated and distributed. Governance: The SIP was created under a Reg NMS Plan, therefore the industry does not have voting rights to changes. Conflicts of Interest: Can the conflicts of interest which exist be managed.

Possible Solutions: Competing Consolidator Model; Adding depth to the SIP feeds; Professional verses Non Professional Users.  

See Summary Report here

Market Data and Our Industry’s Reliance

STA Open Call – November 10, 2016 – Call Notes[1]
Market Data & Our Industry’s Reliance
Presenter: Travis Schwab, Chief Executive Officer, Eventus Systems
Full Replay of Call HERE

Opening Remarks – Jim Toes, STA President & CEO
SEC Equity Market Structure Advisory Committee – EMSAC will hold its next meeting on Tuesday, Nov. 29, which will focus on recommendations from the four subcommittees. STA is drafting a Comment Letter recommending an extension to EMSAC’s charter, set to expire in February 2017. LINK

House Hearing on SEC
SEC Chair Mary Jo White will testify before the House Financial Services Committee on Tuesday, Nov. 15, focusing on the 2018 budget request. LINK

STA in Washington DC
On Tuesday, Nov. 22, STA will meet with FINRA President & CEO Robert Cook and SEC Commissioners Michael Piwowar and Kara Stein. The leadership change at FINRA provides a unique opportunity to discuss FINRA’s role in our industry. The recent proposals to Order Routing Disclosures, or Institutional 606, will be the focus of our SEC meetings.

Market Data: It’s Role in Transparency & Operational Soundness
Executive Summary
Market data continues to be a well-publicized debate – rising costs, consolidated tape versus direct feeds, market structure impacts, etc. The need for data goes beyond trading and it plays a major role in two industry trends: the demand for transparency and improving operational soundness.

U.S. equity markets are unique compared to other markets in that we have fragmented trading but a unified NBBO with an independent source of data. This uniqueness is beneficial to investors but there is friction around consolidated tape (provided by the SIP; slower) over direct feeds (sold by exchanges; more costly).

There is growing demand from regulators for transparency but there are inconsistencies specifically, when to use the consolidated tape versus direct feed; there is a need for clarity and standardization.

Helpful Links
Business Insider: “There’s a new ‘hot-button’ issue on Wall Street…” LINK

For more information on Eventus, go to eventussystems.com, or @TravisSchwab and @ValidusARM on Twitter.

[1] This brief is meant for informational purposes only and therefore should not be considered legal advice. STA’s goal is to raise awareness and encourage industry dialogue.