The industry has witnessed a wholesale shift in its approach to US equity exchanges’ status as self-regulatory organisations (SROs) in recent weeks, led by the regulator and key participants.
An increasing proportion of practitioners believe a change to SRO status for major exchanges would better reflect the diversity of equity trading venues, which now include 13 exchanges, around 50 dark pools and numerous internal broker execution facilities that attract an increasing portion of trading volume.
In a speech this month, Mary Jo White, chair of the Securities and Exchange Commission (SEC) proclaimed the SRO model should be evaluated in light of evolving market structure and trading practices – the SEC’s most direct suggestion yet that SRO status could change.
“This evaluation should include whether the current exchange regulatory structure continues to meet the needs of investors and public companies,” White said.
“Does it provide sufficient flexibility for exchanges to implement transparent trading models that can effectively compete for investor orders? Does the current approach to self-regulation limit or support exchange trading models?” White asked.
Commenting last week on possible changes to the SRO model, Duncan Niederaurer, CEO, NYSE Euronext, said his firm would be fully willing to consider changes to SRO status alongside other key market structure issues, such as the implementation of a trade-at rule to limit off-exchange trading.
Speaking at a market structure conference run by buy-side trade body the Investment Company Institute on Thursday, Niederauer said market participants’ shared interest would be key to wide-ranging industry dialogue on such changes.
“Put everything from SRO status to market data to the trade-at rule to access fees to maker-taker on the table, and let’s have an honest, open discussion about it,” Niederaurer said.
Wider debate
The increasing need to reflect changes to the US equity market brought about by advances in technology and key rules, such as Regulation National Market System (Reg NMS), was an issue taken up at the event by Rich Ketchum, president and CEO of self-regulatory body the Financial Industry Regulatory Authority (FINRA).
Key US exchange operators NYSE Euronext and Nasdaq OMX have largely outsourced their self-regulatory functions to FINRA, which now oversees equity exchanges that handle around 90% of lit market volumes. Operators of the 13 US equity exchanges are all granted SRO status by the SEC.
“The effect of the range of maker-taking pricing seems to have created an environment where the clear choices to explore are private liquidity pools before lit liquidity pools,” he said.
“The variety of rules [including those within RegNMS] all seem to be about order interaction and certainly encouraging priced orders in the market place. That’s worth worrying about,” he said.
Overall, however, Ketchum said equity markets were dramatically better now than they have been previously, and investors have benefitted from a range of regulatory initiatives such as the move to decimalisation.
“The ability for limit orders to be displayed wherever they are and the move to decimal pricing dramatically changed arbitrage [for] certain retail customers and institutional investors in a profound way.”
The effects of Reg NMS have attracted division across the industry regarding its unintended consequences, a theme explored in a report released last week by consultancy TABB Group. Report author Larry Tabb suggested participants must adapt to Reg NMS and use technology to deal with unintended consequences, such as increased fragmentation and speed of order routing.
He said any changes to Reg NMS would come about only if the SEC’s core mandate – that of protecting the end investors, market quality and capital formation – were impeded through the regulation.
“If it could be proven beyond a reasonable doubt that one of these key pillars were clearly impaired, the SEC would have more ammunition to make a radical market structure change,” he said.
“Until the SEC’s views can be shown quantitatively to be wrong, my best advice would be to invest in the technology, understand the structures and use your influence to advocate to your service providers as vociferously as possible,” he said.