Tags: Thinly Traded

Talking Points – December 2019

Talking Points

Who We Are The Security Traders Association, “STA” 1 is comprised of 24 affiliate organizations covering the 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.

Issues

  • SEC Transaction Fee Pilot for NMS Securities
  • Order Protection Rule
  • FINRA Regulatory Notice 18-26; Continuing Education Program
  • Listed Options Working Group, “LOMSWG”
  • Thinly Traded Securities – UTP

Specific Comments

SEC Transaction Fee Pilot for NMS Securities

  • *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.

Order Protection Rule

  • *In 2008 STA wrote “STA is of the opinion that a marketplace without this order protection rule will be superior to enforcing the current OPR. While this opinion would appear “anti-investor”, it is not. While the OPR was well intended, its many complex exemptions complicate compliance and dilute its effectiveness.”
  • *As STA reviews its existing opinion, we will take into consideration OPR’s impact on solutions which seek to improve the trading of Thinly Traded securities and its need in the trading of liquid securities.

FINRA Regulatory Notice 18-26; Continuing Education Program Maintaining Qualification Status Post-Termination

  • *STA believes that FINRA has taken meaningful steps to address what we view as two (2) unreasonable barriers to re-enter the financial services industry exists for individuals with a prolonged absence. Specifically, effective October 8, 2018, FINRA instituted the Securities Industry Essential (“SIE”) Exam. STA believes that the next contributing factor which needs to be addressed is continuing education requirements for individuals away from the industry for a prolonged period of time.

Listed Options Working Group, “LOMSWG”

  • *LOMSWG was formed to address issues regarding the current state of the U.S. options market structure. Formed in Q3’2018, LOMSWG is comprised of representatives from the options Exchange parent organizations; Options Clearing Corporation and the Options Committees of SIFMA and STA.
  • *Since exchanges must ensure that any collective activity on their part conforms to applicable laws, in particular— because the exchanges are competitors—participation by SEC staff is provided.
  • *Among the issues which LOMSWG is currently addressing include: Smarter Strikes ; Exchange Give Ups and Obvious Error RFP Process.

Thinly Traded Securities – UTP

  • *While STA understands and appreciates that the goal of suspending UTP is to enable “innovative market structure solutions”, we have concerns regarding an exchange regime which allows for the suspension of UTP as part of its construct.
  • *As the Commission conducts analysis on UTP suspension filings, it should take into consideration impacts to operational capability and the conditions which encourage enhanced liquidity provision.
  • *Fostering greater operational capability should be the foremost consideration of any regulatory or legislative entity that has oversight or influence on our financial markets. The Commission should consider if one market structure serves operational capability better than another for different types of securities. General areas for consideration could include limiting single points of failure.
  • *Enhanced liquidity is liquidity that exceeds what is publicly displayed and available in the marketplace. A contributing factor in the amount of overall liquidity available is the capital commitment which comes from a subsector of trading centers: market makers, both electronic and traditional; and block traders. Exchanges, by their regulatory requirements are not allowed to commit capital in facilitating liquidity.
  • *While the factors in enhanced liquidity provision are numerous, the Commission should consider the effects of filings which seek to suspend UTP has on certain core ones including:
  • • Quote quality. Displayed liquidity matters, however efforts which seek to increase its levels need to ensure that what is publicly displayed is accessible in a fair and reasonable way.
  • • Volatility. Providers of enhanced liquidity are more inclined to commit capital and more able to conduct block trading if the prices of the security the provider transacts in remains reasonably stable.
  • • Reduction in costs. The withdrawal of market makers and block traders is partially related to the increased costs of trading securities, in particular those of Thinly Traded securities where recouping such costs are difficult.

PDF version here

Talking Points – July 2019

Talking Points

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.

Consolidated Audit Trail – Recent Developments

*There have been a number of positive developments since the SRO’s decision to terminate the contract with Thesys’ CAT.

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.

March 8th Chairman Clayton & Brett Redfearn, Director T&M Fordham Presentation

Thinly Traded Securities – UTP

*It remains STA’s view that shareholders in 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 could be improved through regulatory actions: 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.

STA letter to SEC on proliferation of strikes in option market place

*In a April 5, 2019 letter to the SEC, STA relayed its view that the proliferation of series of options for quoting and trading has overly complicated the options markets and necessitated excessive (and thus inefficient) consummations of technology.

*We noted the Options Listing Procedures Plan (“OLPP”), a national market system plan which defines procedures for introducing new options series into the marketplace is either silent or requires additional guidance in areas instrumental to its overall effectiveness.

PDF version here

Talking Points – March 2019

Talking Points

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 – SEC Roundtable on Thinly Traded Securities

Open Call

Good evening and welcome to tonight’s Open Call on the  SEC Roundtable on Thinly Traded Securities and an update on the SEC Transaction fee pilot, aka the Access fee pilot. Tonight’s call is brought to you by the STA Foundation a 501 c 3 corporation that serves as STA’s educational arm.

Last October, the Department of the Treasury published a report that assessed the U.S. capital markets and offered recommendations for enhancement. Overtime, the Treasury’s report has received a good amount of attention for its content to such a degree that Chairman Clayton identified it as one of two resources he will be using in identifying areas of improvement within our equity markets.

In Chairman’s April 10th speech he noted, and I quote, “The issue of facilitating capital formation and increasing the attractiveness of the public markets for smaller companies is one of my highest priorities as SEC Chairman.  I am concerned that Main Street investors are bearing costs (and missing investment opportunities) as a result of the shrinking number of U.S.-listed public companies.

Chairman Clayton then went on to say:

“The Capital Markets Report highlighted many of these issues and recommended that the SEC consider allowing issuers of thinly-traded securities to suspend unlisted trading privileges, or UTP, for a stock so that it would trade on a smaller number of venues until liquidity reached a minimum threshold.  I anticipate that this recommendation will receive close review at the staff’s roundtable.”

An executive summary report is here