Wednesday, April 11, 2018

Clayton and Redfearn address equity market structure

By Jay Fishman, J.D.

SEC Chairman Jay Clayton and Trading and Markets Division Director Brett Redfearn addressed equity market structure at an April 10, 2018 symposium sponsored by the University of Chicago and the STA Foundation. Clayton began by emphasizing that equity market structure is integral to the SEC’s three-part mission: (1) to protect investors; (2) maintain fair, orderly and efficient markets; and (3) facilitate capital formation.

Regarding Main Street investors, he said that the focus must be on protecting their long-term interests by fostering transparency with regulations created to allow them public access to material information for empowered investing. But he cautioned that the Commission must listen to those investors and to market participants as well, to ensure that the adopted regulations are functioning as intended. Additionally, he stressed the need for coordination with other regulators to strike the right balance between capital formation and investor protection.

Equity market structure questions and initiatives. Clayton remarked that the Commission does not have to start from scratch to determine the pertinent equity market structure questions, but can jump start its efforts from the following already published materials:
  • The Equity Market Structure Advisory Committee (EMSAC) tackled a broad spectrum of market structure topics from which it made thoughtful recommendations to the Commission; and 
  • The Treasury Department in October 2017 published an insightful report assessing the U.S. Capital markets, and offered recommendations for enhancement. 
Additionally, Clayton mentioned two equity market structure initiatives recommended by the Capital Markets Report (that received broad market participant support):
  1. The Commission’s 2015 proposal to enhance alternative trading system (ATS) operational transparency; and 
  2. The SEC’s 2016 proposal to enhance transparency of broker order routing practices. 
Lastly, Clayton proclaimed that the need for market participant input has prompted the Trading and Markets Division to host a series of staff roundtables devoted to specific equity market structure topics that EMSAC raised with the Commission.

Redfearn, as the Division Director discussed these roundtables in detail. The first one, occurring on April 23 2018, will address the market structure for thinly-traded securities, both equities and ETPs. The purpose of this roundtable, declared Redfearn and Clayton, is to determine whether the current single equity market structure for all NMS stocks, large and small, liquid and illiquid is appropriate for thinly-traded securities.

The second staff roundtable, said Redfearn, will focus on issues related to market participants having access to a wide range of products and services offering differential access to markets and market data. He noted that this differential access raises important questions, some of which are subject to proceedings pending before the Commission. The roundtable would build upon the Commission’s resolution in the proceedings by addressing, for example, the impact of differing views on maintaining fair, orderly and efficient markets, as well as the impact and desirability of many market participants to get data at slower speeds because they are unwilling or unable to pay the rates for the fastest access.

The third staff roundtable, Redfearn said, will address regulatory approaches for combatting retail fraud. He reiterated Clayton’s point that strengthening market structure will enhance and protect the long-term interests of main street investors. Redfearn believed that the roundtable would particularly focus on fundamental market structure objectives in the context of digital assets and penny stocks.

Tick and transaction fee pilots. Redfearn separately referred to two pilots currently underway. The “Tick Pilot” he said is studying the impact of wider pricing increments in stock of smaller companies. The transaction fee pilot, proposed on March 14 2018, was EMSAC-recommended to allow the Commission, market participants, and the public to observe how order routing behavior, execution quality, and market quality may change across different test groups, which should help determine the regulation questions to ask.

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