Tags: Transaction Fee Pilot

Trading Views Podcast

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.

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 – 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

Talking Points – August 2018

Talking Points

Talking Points – August 22, 2018

 

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.

STA Issues:

*Consolidated Audit Trail, (“CAT”): Industry Reliance on Vendors; Testing Timelines; Proposed Regulatory Conformance Period and FINRA autonomy on decisions affecting OTC securities.

*Access Fee Pilot: Treatment of ETFs; Coordination with the Canadian Securities Administrators

*Exchange and Industry Working Group on Listed Options

*Tick Size Pilot Assessment Report

 

Specific Comments:

Consolidated Audit Trail, (“CAT”):

Industry Reliance on Vendors; Testing Timelines & Proposed Regulatory Conformance Period.

*It is reasonable to expect that a majority of firms will rely on third party vendors for their data capture and reporting obligations under CAT.

*Data capture falls into broad categories: expansion of existing data capture and new data capture. The former is less complex but both require vendors to have all the data requirements and formats in place prior to any work/testing being done by firms they service.

*As it pertains to testing for CAT, this two-step work flow of; vendors testing followed by testing with firms is a sequential and not parallel process. Firms cannot begin work on delivering data to their vendors until they have received the specifications from them.

*STA is supportive of the remarks and recommendations made by the Financial Information Forum in their letter to the Commission, dated August 20, 2018, in particular,

“…FIF supports the proposed Regulatory Conformance Period, which should allow Members the necessary 6-month test period to test their systems, work to reduce reporting errors and perform additional data validation checks prior to regulatory scrutiny while meeting the Industry Member CAT Reporting implementation dates.”

FINRA autonomy on decisions effecting OTC securities and CAT

*CAT Requirements for OTC Securities are currently driven by the NMS plan which is primarily dominated by exchange SROs.  OTC Securities trading activities historically have been (and for the foreseeable future) will continue to be primarily overseen and monitored by FINRA and not by the SROs of exchanges.

*It is clear that the rules applicable to the trading OTC Securities are unlike the rules associated with trading NMS securities.  It is therefore likely that there will be certain surveillance requirements for NMS securities that are not requirements for OTC Securities and visa-versa.

*FINRA is in the best position to make the determination as to the oversight requirements for OTC securities and the corresponding CAT reporting obligations.  Under current CAT governance FINRA’s interest for OTC securities surveillance may have to compete with the interests of the SRO exchanges.

*We believe that FINRA should be able to do this autonomously through their rule promulgation process rather than through debates with the NMS plan participants.

Access Fee Pilot

Exchange Traded Funds and Products (“ETPs”)

*ETPs are unique investment vehicles which offer investors exposure to the performance of indices or desired exposures. While the equity market structure generally works well for ETPs, unique characteristics of ETPs merit consideration in equity trading rules.

*As it pertains to the Access Fee Pilot, industry feedback which expresses concern on competitive dynamics of ETPs which offer similar exposures offers recommendations which fall into two broad categories:

  • ETPs should not be included in the Pilot
  • ETPs should only be included if an elegant solution to the competitive dynamics of ETPs which offer similar exposure can be devised.

*STA believes evidence exists that when liquidity provision is encumbered, ETPs become less efficient, therefore STA believes that special consideration, perhaps even exemptions, be considered for them.

Canadian Securities Administrators (“CSA”) Initiative to Study Marketplace Rebates

*In a letter to Chair White, dated November 13, 2014, Canadian STA, (“CSTA”) brings to the attention of the Commission the opportunity to conduct a cross border study of the effect of market place rebates on market quality in dually-listed securities.

*Many respondents to the CSA’s proposal expressed concerns that without U.S. involvement, a pilot would lead to dramatic differences in the trading economics on inter-listed stocks between Canadian and U.S. markets. For this and other reasons, the CSA did not move forward with its proposed pilot study.

*STA recommends that the Commission approach the Canadian Securities Administrator to determine if an opportunity exists to coordinate efforts on an access fee pilot.

 

Exchange and Industry Group letter requesting committee on the options markets

*In a letter to Mr. Brett Redfearn, Director, Division of Trading & Markets, SEC, dated June 4, 2018, Cboe, SIFMA and STA requested the formation of a working group with the purpose of making recommendations towards improving to enhance displayed liquidity in all options classes, including greater size and smaller spreads.

*This working group was formed to address concerns regarding the current state of the U.S. options market structure generally. This working group is comprised of one representative from each the options Exchange parent organizations; SIFMA; Options Clearing Corporation, “OCC” and STA.

*Exchanges must ensure that any collective activity on their part conforms with all applicable laws, in particular with the antitrust laws.

Tick Size Pilot Assessment Report

*Section VIII of the Tick Size Pilot Plan requires the Plan Participants to submit to the Commission and make publicly available a joint assessment of the impact of the Pilot. The Participants submitted the joint assessment to the Commission on Tuesday, July 3, 2018 and a revised version on August 3, 2018. STA and many of its members are only recently aware that this report was made public.

PDF version here

Comment Letter: Proposed Access Fee Pilot

Comment Letters

Dear Mr. Fields:

STA welcomes the opportunity to offer comment on the Securities and Exchange Commission’s (“SEC” or the “Commission”) proposed Transaction Fee Pilot for NMS Securities (“Pilot”).

As the Commission states in the summary of the proposed rule:

The purpose of the Pilot is to study the effects that transaction-based fees and rebates may have on, and the effects that changes to those fees and rebates may have on, order routing behavior, execution quality, and market quality more generally.

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