SIFMA does not pull punches with market structure recommendations

If the Securities Industry and Financial Markets Association has its way, broker-dealers and market centres would face major changes to improve the transparency, liquidity and resiliency of the US cash equities markets.
If the Securities Industry and Financial Markets Association (SIFMA) has its way, broker-dealers and market centres would face major changes to improve the transparency, liquidity and resiliency of the US cash equities markets.

Issued six days after the US Senate Banking, Housing & Urban Affairs Committee quizzed panels of institutional investors, exchange operators and industry experts on how regulation is shaping equity market structure and electronic trading, the industry body suggests market reforms that range from improving individual broker-dealer transparency to the dismantling of securities information processors (SIPs).

“The US has the deepest and most liquid stock market in the world. Innovation, competition and regulation have made the equity markets more efficient and better for investors today than they ever have been,” said Curt Bradbury, chief operating officer of Stephens Inc., and chair of the SIFMA Board’s Market Structure Task Force. “However, the evolution of our equity markets has shown that there are aspects that should be improved or corrected, so that markets operate in a manner that supports fairness and stability. We believe these recommendations will help shape the best path forward.”

The recommendations, assembled by the SIFMA Board Committee on Equity Market Structure, advocate that regulators direct broker-dealers to publish standard disclosure reports that would provide institutional investors details on the venues broker-dealers accessed, which order types they used on exchanges and their fill rates (including internalised trades) as well as their co-location footprint and market data structure regularly.

The board further suggests that ATS operators should publish their Form ATS and make them publicly available as well as having sell-side trade internalisers fall under Financial Industry Regulatory Authority’s Rule 4552, which requires ATS operators to submit a weekly report detailing the trading volume and number of trades transacted on their platforms.

Exchange operators also should make standard and regular disclosures of their order routing practices, order type interaction and the execution volumes of displayed, non-displayed and partially displayed orders, according to the SIFMA publication.

Such reports likely would be more detailed than what are required by the Securities and Exchange Commission’s Rule 605 and 606 that disclose a market centre’s execution quality statistics and broker-dealers’ order routing.

“These disclosures currently do little to inform retail customers how well their orders are being filled,” stated James Angel, professor of finance at Georgetown University’s McDonough School of Business, earlier and before the Senate committee.

Joe Ratterman, CEO of BATS Global Markets and who also appeared before the committee, recommends that any changes to Rule 605 and 606 also reflect advancements in technology.

“The current requirements of Rule 605 effectively allow a trading venue to measure the quality of a particular execution by reference to any national bid and offer (NBBO) in effect within the one-second period that such a an order was executed,” he explained at the time. “Given the frequency of quote updates in actively traded securities within any single second, compliance with this requirement may not in all cases provide adequate transparency into a particular venue’s true execution quality.”

Changing the exchanges

Various market centres are most likely to feel the heaviest brunt if US regulators adopts the industry body’s suggestions like having exchange operators reduce their fees to access market centre quotes to no more than US$0.05/100 shares, if not eliminate them completely.

“This would make it more likely that broker-dealer activities will be performed in a manner and with an outcome more consistent with their clients’ best execution objectives rather than their own pecuniary interests,” said Kevin Cronin, global head of trading at asset manager Invesco, regarding a similar proposal made at the Senate hearing.

SIFMA also suggests that if an exchange’s trading volume in all NMS stocks fall below 1% for three consecutive months that the exchange would lose its protected quote status.

On the market data side of the business, the SIFMA committee presented a two-step plan to improve the reliability of the securities information processors (SIPs), that aggregate direct market data feeds from the equities exchanges into two consolidated market data feeds.

The first step would require each market that reports into a SIP to establish a service-level agreement (SLA) with the SIP operator to ensure the market’s messages are time-stamped in milliseconds and include executions, comparison deletes, out-of-sequence updates, duplicate message latency and outstanding heart beats. Failure to live up to the SLA, would permit the SIP operator to disconnect the market’s session and zero out its quotes.

From the SIP operator’s perspective, the organisations would be required to improve the SIP’s infrastructure so that the SIPs would have the fastest commercially available services for data aggregation and distribution.

However, SIFMA sees replacing the SIPs with commercially competitive Market Data Aggregators (MDAs), which would distribute the NBBO as well as the other information currently distributed by the SIPs. The MDAs might be individual exchanges, a group of exchanges or existing financial technology vendors, according to SIFMA officials.

Overseeing the competing MDAs would be a central Market Data Plan Operating Committee, consisting of representatives from MDA-reporting market centres and market participants.

“These recommendations promote fairness, stability and transparency in the equity markets to help ensure the market structure works in the best interests of all investors,” added Kenneth Bentsen, president and CEO of SIFMA.