By Joanne Cursinella, J.D.
The SEC is proceeding down a new path, and the current direction is such a complete change from the past few years that it can be called “SEC 180,” SEC Commissioner Michael S. Piwowar commented in his keynote address at the Unity Market Structure conference sponsored by FINRA and Columbia University. Market structure is not merely a subject we take up in response to a market event, a congressional inquiry, or a non-fiction book on high-frequency trading, he said. Rather, it sits at the core of the Commission’s mission, he claimed.
Current market strategy. From July 2010 through December 2016, the Commission’s policy agenda was determined by what Piwowar called “the Dodd-Frank Death March.” The mandates the Act placed on the SEC used up “an incredible amount of the agency’s resources and ultimately prevented the agency from working on important discretionary policy initiatives,” while simultaneously the SEC “also sunk a large portion of its scarce enforcement resources into a so-called ‘broken windows’ approach.”
But now, instead of mechanically plodding through implementation of the Dodd-Frank Act, the SEC is taking a fresh look at how the agency can better facilitate capital formation, the oft-forgotten third part of the SEC’s mission, Piwowar said. Issues surrounding market structure will be an integral part of new discussions. Comparing market structure to “the gears that turn the clock of the capital markets,” he said the details of market structure matter because they ensure the smooth operation of our complex financial markets.
In addition, market structure issues will take priority in the broader discussions around the financial markets, as evidenced by the Department of the Treasury’s recent report on capital markets, Piwowar claimed. That report contained an impressive level of focus and detail on market structure issues and provides strong support for the Commission’s ongoing efforts, he said.
Recent developments. The Commission’s Equity Market Structure Advisory Committee (EMSAC) has submitted practical recommendations to the SEC for consideration on issues such as market quality, execution quality and order handling disclosures, and an access fee pilot. Piwowar has been pleased both by the level of engagement of EMSAC members and by their thoughtful recommendations.
In addition to EMSAC’s work, Piwowar pointed to other positive advances in the equity market structure space. For example, the Commission approved a pilot to study the impact of wider tick sizes for small cap stocks. That pilot began in October 2016 and continues to collect data to help the Commission, academics, and market participants analyze the impact of these changes, Piwowar said. .Another recent market structure change worth noting, he said, is the shortening of the settlement cycle from T+3 to T+2, a change that was a long time coming. Piwowar commend the industry for their work to prepare for this change and drive it to completion.
Next phase. Piwowar is optimistic that the next phase of the Commission’s oversight of the securities markets will be known for its positive impact on market structure. First, there must be a review of market structure which must begin by exploring how the markets have evolved and become what they are today, he said. It must ask how competitive forces and regulation have combined to create our existing market structure and whether that result was intended or even desirable. The review should also try to uncover the incentives that drive the decisions of market participants. Only once the incentives at play have been identified can we make choices about which alternatives may best facilitate competition on choice, pricing, and innovation, Piwowar claimed.
The Commission must not conduct market structure work in a vacuum, though. It is vital that we receive the views and observations of the public to inform the market structure debate, Piwowar said. EMSAC has been a major driver of public dialogue on these issues, and we must continue to allow our review of market structure to benefit from vigorous public discourse, he added.
In addition to the EMSAC, Chairman Jay Clayton has announced his intention to form a new Fixed Income Market Structure Advisory Committee (FIMSAC), Piwowar noted. He fully expects the FIMSAC members to engage in difficult conversations, tackle challenging issues, and generate constructive recommendations for the Commission to consider. Of particular importance to Piwowar in the fixed income market structure space are areas like pre-trade transparency and the appropriate role of regulators vis-à-vis market-based solutions in providing that transparency. He hopes that the FIMSAC will provide insights into such issues.