Recently appointed commissioner Michael Piwowar today voiced his support for a comprehensive review of US equity market structure, suggesting that the Securities and Exchange Commission (SEC) should follow the lead of the UK’s Foresight Programme by inviting input from industry and academia.
“We can cover a much wider range of topics – in other words be more comprehensive – and do so in more depth if we can leverage the resources of outside parties,” said Piwowar, making his first speech on equity market structure at the 2013 Global Trading and Market Structure Conference in London.
The Foresight Programme, which is designed to inform future UK government policy-making on a variety of topics, produced a series of commissioned papers as part of a two-year study on the impact of computer-based trading in the financial markets, which concluded in 2012.
Piwowar, who was sworn in as an SEC commissioner in August, criticised the US securities watchdog for failing to conduct a broad review of market structure in the aftermath of the 2010 flash crash and for effectively abandoning its Concept Release on Equity Market Structure, published in January 2010.
A number of high-profile events in recent years have highlighted the market's vulnerability to algorithmic trading, such as the May 2010 flash crash, in which the Dow Jones Industrial Average dropped nearly 10% before recovering minutes later, and Knight Capital’s 2012 algo error which wiped US$440 million from the firm’s stock price.
Piwowar said that the review should not necessarily seek to develop “a grand plan” to resolve all the problems and weaknesses in the US market structure. “It does, however, mean we should put everything on the table for discussion,” he added.
Piwowar said a review should encompass a wide range of market structure issues, including the technology and interconnectivity of market centres, classification and treatment of various market participants, undisplayed liquidity and off-exchange trading, exchange pricing models and the oversight of self-regulatory organisations.
He also said that the SEC must consider its own role in creating the present US equity market structure. “We must question whether the fragmentation and intermediation that many now decry as disadvantaging retail customers may be directly attributable to Regulation NMS,” said Piwowar.
Noting that the review should take years rather than months, he said that the SEC should continue to make incremental improvements to US market structure, and called for a swift introduction of a pilot programme to increase tick sizes for small-cap firms. Piwowar said he was “disappointed” at the delays that prevented the pilot – which was mandated in the 2012 JOBS Act – starting already.
“We cannot allow potential complications to paralyse us and prevent us from taking action, especially where it is likely that we will be statutorily mandated to undertake a pilot programme if the commission does not do so of its own initiative,” he said.
The Commission hosted an industry roundtable on the topic in February and has called for proposals for a tick size pilot programme. An October proposal from Citi called for wider spreads in a subset of stocks so institutional and retail investors would have more protection from participants such as high-frequency traders.