July 5, 2016
The Equity Market Structure Advisory Committee serves a useful function, but its function could be improved. Notably, the Notice of this July 8 meeting did not include: 1)An Agenda; 2)a notice of an link to the subcommittee recommendations on the NMS Plan Advisory Committee which would be considered at the meeting; 3)a notice of and link to the Access fee pilot program recommendations. In the future any such Notice at Regulations.gov, and in the federal register, should include Agendas, matters to be considered, and any staff presentations to be made. If the objective is to permit public comment and review of EMSAC activities and recommendations, minimal notice requirements must be followed.
In connection with these recommendations, which can only be found by going to the EMSAC site, and then tabbing on the meetings tab, and then individually the listed materials, two recommendations are being made, one regarding the NMS Advisory Committee, and one regarding the access fee pilot. These suggested actions may be intelligible to industry participants and exchange representatives, but they should be presented by giving big picture description of their function, ie how activities to be modified fit into overall equity market structure and flow, as well as what market participants are covered by recommendations.
I commend the testimony of Stephen Luparello as more transparent and understandable to the Senate Committee on Banking, Securities Subcommittee in March 2016. Luparello describes the nature of the exchanges, being discussed, the numbers, and the dynamics of markets in the following excerpted materials. He notes SEC is deals with 12 registered exchanges, 40 Alternative Trading Systems, and 200 non-ATS Broker dealers.
"Today's equity markets, as you know, are dominated by computer algorithms. These algorithms are capable of generating, routing, and executing orders with enormous sophistication, volume, and speed. They have introduced types of market mechanisms and trading practices that were not possible in the days of manual markets."
.....discussing newly developing requirements to assure fair markets and adequate regulation and disclosure
"Membership Requirements for Dealers Trading in Off-Exchange Venues
In March 2015, the SEC proposed amendments to Exchange Act Rule 15b9-1 that would require broker-dealers engaging in proprietary trading at off-exchange venues to become members of a national securities association. SEC staff is reviewing comments on the proposal and is working to prepare a recommendation for the Commission to consider in 2016.
Enhanced SEC Recordkeeping Requirements for Trading Algorithms
SEC staff is developing a rulemaking recommendation for the Commission to consider that would strengthen recordkeeping requirements for algorithmic trading. Such requirements may encompass key elements of the algorithm itself, as well as a record of the orders generated by the algorithm. Such records would provide greater transparency for regulators into algorithmic trading.
Status of Unregistered Broker-Dealers
SEC staff is developing a recommendation for the Commission to consider in 2016 that would clarify the status of active proprietary traders that are not registered as broker-dealers and subject certain of them to the SEC and SRO regulatory regime for broker-dealers.
Anti-Disruptive Trading Rule
SEC staff is developing a recommendation for the Commission to consider that would address the use of aggressive, destabilizing trading strategies in conditions when they could most seriously exacerbate price volatility. Such a rule will need to be carefully tailored to apply to active proprietary traders in short time periods when liquidity is most vulnerable and the risk of price disruption caused by aggressive short-term trading strategies is highest."
The EMSAC should be advised of the status of these recommendations referred to as SEC actions in Congress
With regard to the recommendations of a Subcommittee for an Access Fee pilot program, with four levels of access fee capping, it is not desribed what, or how many markets or exchanges would be in the program. ATS would not be, apparently. Nor would ETPs. In essence, lowering or capping the access fee, provides for more liquidity information and pricing access to traders able to use this information in algorithmic or high frequency trading. Therefore, an important measurement of any access fee results would be the extent to which the selected securities, 10 initially, then 100, over 2 years, are subject to algorithmic trading opportunities.
There should be analysis of impact of these recommendations on SEC and Chairman priorities: Market stability, High frequency trading, fragmentation, broker conflicts, and quality of markets for smaller companies. Indeed, EMSAC should discuss progress in these areas, including new registration requirements and new data submission to allow data driven market analysis and enforcement.