The US Securities and Exchange Commission (SEC) will place a focus on the interests of long-term investors as it tries to assess the performance and fairness of the US equities market structure.
On 14 January, the SEC issued a ‘concept release’ seeking comment from the industry about a broad range of issues relating to equity market structure as part of its continuing review. One of the aims of the release is to ascertain how well the equity market is functioning, and whether further regulatory change is required to improve it.
The commission describes long-term investors as “the market participants who provide capital investment and are willing to accept the risk of ownership in listed companies for an extended period of time.” It distinguishes them from professional traders, which it says generally seek to establish and liquidate positions in a shorter timeframe.
The SEC acknowledges that the interests of short- and long-term investors can converge, noting that the collective effect of professional investors competing to profit from short-term trading strategies can benefit long-term investors, for example by dampening volatility.
However, it adds, “Where the interests of long-term investors and short-term professional traders diverge, the commission repeatedly has emphasised that its duty is to uphold the interests of long-term investors.”
The commission wants to gather views on how all types and sizes of individual and institutional investors are faring in the current market structure. For example, it asks whether the structure has become so dispersed and complex that only the largest institutions can afford to deploy sophisticated trading tools and if so, whether smaller institutions can trade effectively. It also asks how accessible advanced broker-dealer services such as smart order routing and execution algorithms are to smaller institutions.
In addition to the performance of the market structure, the SEC concept release seeks comment on two other main areas: high-frequency trading and non-displayed liquidity. Under high-frequency trading it is looking for information on the different strategies employed by traders, such as passive market making and arbitrage, and the tools they use, such as co-location and trading centre data feeds.
For non-displayed liquidity, the commission wants feedback on order execution quality, public price discovery and fair access to and regulation of alternative trading systems.
However, the SEC is keen not to limit comments to the areas it highlights in the release, and invites participants to comment on any aspect of the current equity market structure.
Market participants have until 21 April to submit their responses.