Ongoing calls for greater transparency and continued emphasis on stable infrastructure will dictate priorities for US equity market regulators this year, but the Securities and Exchange Commission (SEC) will do little to address off-exchange trading, industry insiders predict.
Its enforcement activities notwithstanding, the SEC will continue to pursue key market structure initiatives in 2014, which include responding to industry comment on Regulation Systems Compliance and Integrity, deciding how to implement a tick size pilot program and bringing exchanges together to strengthen their underlying technology.
But, despite record high figures of off-exchange trading, which in September reached nearly 40% of US equities, placing stricter rules on alternative trading systems (ATSs) will not likely occur, with fellow US regulator the Financial Industry Regulatory Authority (FINRA) continuing to take a more prominent role in dark pool oversight.
A recent dark trading report from broker Rosenblatt Securities estimated that 14.54% of all US equities in November executed in dark pools, contributing to a total monthly figure for off-exchange trading of 37.5% of US equities.
“The SEC will probably not address dark pool trading in 2014 because it realises the issue needs a holistic approach – it’s not something that can be looked at in isolation,” Jim Toes, president and CEO of industry body the Security Traders Association, said, adding “FINRA will be more active in ensuring business practices for firms that operate dark pools are appropriate.”
FINRA is expected this year to implement a dark pool reporting initiative formed last year after dark pool operator Credit Suisse decided to pull support from informal reporting through Rosenblatt and consultancy TABB Group. The plan has gained support from the industry and FINRA is expected to tweak the final details in light of industry input received through a comment period that ended late last year.
Joe Saluzzi, partner and co-head of equity trading for broker Themis Trading, agreed the SEC would not likely address dark pools in 2014, but cited inaction on the Commission’s 2009 dark trading proposals as evidence it should address the growth of off-exchange trading, particularly around transparency.
“There is still a major lack of transparency for dark pools. [Recently launched ATS] IEX has made its form ATS available online, which is a positive move for the industry and one which other ATSs should follow to show how they operate, especially around payment for order flow.”
Tick size reform
The SEC is expected to finalise details of a pilot program to widen tick sizes in certain equities, to attract liquidity in small- and mid-cap names, as part of the Jumpstart Our Business Startups (JOBS) Act.
Several comment letters and proposals have been submitted to the SEC, including a detailed programme outlined by Citi, while October comments from chair Mary Jo White suggested the SEC would keep the pilot program high on its agenda. In January, the SEC’s Investor Advisory Committee is set to report on potential outcomes of such a pilot programme for end-investors.
“This type of tick size reform will benefit the industry although any pilot programme should include a minimum price improvement and avoid any loopholes for brokers,” Saluzzi said.
Toes believes the SEC will place a greater focus on shoring up key market infrastructures in 2014. Although this is not a new priority, it has attracted wider attention in recent years, due in part to high-profile trading errors. Because of this, a greater number of Washington agencies will monitor the stability of the securities market, including the US Treasury.
Toes points to two recent reports from the Treasury’s Office of Financial Research – one on asset management and financial stability and another looking at market structure changes across 2013 – as evidence the Treasury will play a greater role in changes to equity market rules, even if this occurs in a more consultative way with the SEC.
“There will be more agencies apart from the SEC looking at equity market structure reform going forward, and even if bodies like the Treasury have little say in creating final rules, one would expect their efforts to impact SEC policy in some way,” Toes said.
For Reg SCI, the SEC will review industry comment throughout the year, although there is no set timeline or upcoming dates by which the Commission must act on these submissions. The SEC confirmed to theTRADEnews.com it is still assessing industry input but did comment on what outcomes were expected in 2014.
The efforts of the Commission in bringing together exchange operators in the wake of the 22 August trading error on Nasdaq’s exchange, which caused a three-hour trading pause, will continue to manifest this year. In November, the 11 self-regulatory organisations present at the 12 September meeting released a statement of intent covering five broad areas that they will work together to improve, including strengthening the securities information processor, which disseminates market data and which was the cause of Nasdaq’s August error. Changes related to this meeting will occur through future SRO filings to the SEC.