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Evolving Equity Markets Require Constant Attention[1]

Commissioner Luis A. Aguilar

Oct. 27, 2015

I want to extend a warm welcome to the members of the Equity Market Structure Advisory Committee (“Committee”).  I appreciate the work that you do and, in turn, how this work informs the Commission’s efforts to fulfill its mission.  I also want to welcome everyone in the audience, whether participating in person or via the internet.

Well, if we needed more proof of the importance of this Committee, we’ve gotten it.  Although, it’s been only five months since this Committee’s first meeting, we have already witnessed two major market disruptions.  The first was a software glitch in July that halted trading at one major exchange for several hours.[2]  That event highlighted a glaring shortcoming in our current market infrastructure, specifically, the fact that the primary exchanges still have no back-up plan for their opening and closing auctions.[3]  This was especially disconcerting because in November 2013, the exchanges issued a public statement acknowledging the importance of developing backup plans for their critical functions—including their opening and closing auctions.[4]

After the July 8th event, the exchanges announced that they are again revisiting this issue,[5] but it is unfortunate that they hadn’t acted sooner.  The aggressive pace at which our markets have been evolving in recent years—the exponential growth in the number and variety of ETFs is just one example—suggests that a proactive approach is preferable to a reactionary approach.  I urge the staffs of the exchanges and the Commission to work toward developing a robust contingency plan for the exchanges’ vital infrastructure.  I also urge this Committee to consider whether other aspects of our market structure need to be buttressed with contingency plans.

The second noteworthy market disruption occurred on August 24th, when we witnessed how acute volatility can wreak havoc with our equity markets in unforeseen ways.  On that day, delays in the openings of certain stocks caused a spike in volatility, which led to the temporary loss of $1.2 trillion in market value.[6]  The effects were especially pronounced for exchange traded products, many of which traded at sharp discounts to the indices they were designed to track before returning to more normal levels.[7]  These events laid bare certain flaws in our current market structure that require urgent attention.  A particularly acute problem involves the process for reopening trading after a halt is imposed under the limit up/limit down rules. 

Trading was halted 1,278 times on August 24,[8] with trading in 257 securities being halted multiple times.[9]  The reasons for this are inter-related and complex, but some experts have suggested that we need to examine the exchanges’ re-opening auctions to ensure that trading can resume as efficiently as possible during periods of intense market stress.[10]  This is a particularly challenging issue in today’s markets, where algorithmic trading is now responsible for more than half of daily trading activity.[11]  These algorithms may not be programmed to deal with rare events like re-opening auctions or extreme spikes in volatility,[12] and this may be one reason that re-opening auctions on August 24th struggled to attract liquidity.  Finding ways to address this new market paradigm is one of the questions this Committee will need to address.

Of course, the events of August 24th raised a number of other issues as well, many of which I addressed in my remarks at the SEC’s Investor Advisory Committee meeting just two weeks ago.[13]  I hope that the members of this Committee will work with the members of the Investor Advisory Committee’s subcommittee on market structure to bring their collective expertise to bear on these pressing issues.

Before turning to the issues on today’s agenda, I note that the composition of this Committee has received a degree of attention in recent weeks from a variety of sources.[14]  I won’t speak to the relative merits of these comments, but I will note that, at the first meeting of this Committee, I expressed the concern that this Committee’s composition did not reflect all of the viewpoints that are relevant to the issues under consideration.[15]  To that end, it is necessary for this Committee to proactively solicit regular input from other groups with a stake in the quality, fairness, and resiliency of our equity markets, particularly retail investors and issuers.  In a similar vein, I encourage anyone with views on these important topics to submit a comment to the Committee via the Commission’s website, or to request an opportunity to appear before the Committee.

Today, the Committee will be taking up two important issues, the use of the so-called maker-taker pricing model, and the regulatory status of trading centers.  Prior to this Committee’s first meeting in May, I publicly released a statement that discussed in detail many of the issues surrounding certain key aspects of our equity market structure, including the maker-taker system and competition for order flow.[16]  One of the areas I analyzed involved the relative merits and drawbacks of the maker-taker model.  In the end, I concluded that the Commission should implement a pilot program in which maker-taker rebates would be suspended for the most liquid stocks.[17]

In addition, a more recent study has provided even more evidence that the conflicts of interest created by the maker-taker pricing model can cause investors to receive less than optimal executions of their trades in some instances.[18]  In light of this, I encourage the Committee to recommend to the Commission that it begin work on a maker-taker pilot program similar to the one described in my May 11th statement.  This program should be less complex than the current tick pilot program. 

The maker-taker pricing system and the regulatory status of trading platforms are clearly pressing issues that demand the Committee’s prompt attention.  But since this may be the last time I have an opportunity to address the Committee as a Commissioner, I would like to take the opportunity to pose some longer-term questions that I hope the Committee will consider as it holds additional meetings:

  • A recent estimate found that institutional investors now hold fully 80 percent of the outstanding shares of U.S. large cap firms, up from only 50 percent fifteen years ago.[19]  Given that retail investors are increasingly relying on professional asset managers, whose trades are typically larger and more impactful, what implications does this have for the structure and regulatory framework of our equity markets? 
  • A recent article authored by employees of the Federal Reserve Bank of New York concluded that market liquidity generally has not deteriorated in recent years.[20]  Other studies, however, have reached differing conclusions.[21]  This Committee should make its own inquiry.  In particular, the Committee should look at whether there is adequate liquidity for institutional investors, who now play a greater role in our equity markets.  If not, how can our market structure address the liquidity needs of buy-side firms without impairing market quality for retail investors? 
  • In addition, liquidity has become more brittle in recent years, and more apt to flee during periods of market stress.[22]  The Committee should examine the causes of this phenomenon and how market structure might be contributing to it.
  • The aggressive growth of indexing in recent years has concentrated investment activity in the largest and most liquid stocks.  What implication does this hold for market stability and volatility?  And, is it impairing capital formation for smaller stocks?
  • How has the growing use of so-called systematic trading strategies, such as risk parity,[23] affected the stability of our markets?  Could it be partly responsible for the perceived intensification of liquidity risk in our equity markets?[24]  If so, how can regulators better monitor the use and the implications of such strategies?[25]
  • How should the Commission address the problem of excessive intermediation in our equity markets?  Is it possible to distinguish proprietary trading firms that act as liquidity providers from those that engage in disruptive trading strategies?  If so, how should the Commission address firms that employ the latter?
  • Do public exchanges still remain an attractive destination for smaller and emerging companies, or are venture capital and private equity firms winning the race?  Does the current equity market structure contribute to the declining number of initial listings?

As I said, this may well be the last time that I address this Committee as a Commissioner.  In light of that, I would like to thank each of the Committee members one last time for your service.  But I would also ask you, as I did before the last meeting, never to lose sight of the fact that our equity markets need to be structured, first and foremost, to meet the needs of investors and issuers.[26]  These market participants are the very reason our equity markets exist, and it is their interests that need to come first. 

Thank you. 

[1] The views I express are my own, and do not necessarily reflect the views of the U.S. Securities and Exchange Commission (the “SEC” or “Commission”), my fellow Commissioners, or members of the staff.

[2] Nathaniel Popper, The Stock Market Bell Rings, Computers Fail, Wall Street Cringes, The New York Times (July 8, 2015), available at

[3] Sam Mamudi and Dave Michaels, NYSE Outage Shows a Need for Plan B, BloombergBusiness (July 10, 2015), available at  

[4] See Self-Regulatory Organizations Response to SEC for Strengthening Critical Market Infrastructure, Intercontinental Exchange (Nov. 12, 2013), available at

[5] See NYSE and Nasdaq to Increase Resilience of Closing Auction Process for U.S. Equities, Intercontinental Exchange (July 22, 2015), available at

[6] Annie Massa, Market Players Pipe Up on Lessons From Aug. 24 Market Volatility, BloombergBusiness (Oct. 15, 2015), available at

[7] See Chris Dieterich, Many ETFs Saw Wacky Trading In Monday’s Selloff, Barron’s (Aug. 25, 2015), available at

[8] Philip Pearson, ITG Volatility Series: Trading Halts (Sept. 29, 2015) (noting that, on August 24, trading in ETFs was halted 1,008 times), available at

[9] Id.

[10] See Remarks of Eric W. Noll, President and Chief Operating Officer of Convergex Group, at the October 15, 2015 Meeting of the Investor Advisory Committee, available at; see also Remarks of Chris Concannon, President and CEO of BATS, at the October 15, 2015 Meeting of the Investor Advisory Committee, available at

[11] Gillian Tett, Welcome to a wild world of robot investing, The Financial Times (Aug. 27, 2015), available at

[12] Henny Sender, Human traders can still beat computers, The Financial Times (Sept. 14, 2015) (noting that, on the morning of August 24, 2015, “[a]s volatility spiked beyond the ranges they had been programmed for, the high-frequency traders, the so-called robo traders and the stat arbs did what they were supposed to do, they unplugged and stopped trading.”), available at

[13] Commissioner Luis A. Aguilar, How Can the Markets Best Adapt to the Rapid Growth of ETFs? (Oct. 15, 2015), available at

[14] See, e.g., Exchanges, Schwab criticize SEC market structure committee, Reuters (Oct. 20, 2015), available at

[15] Commissioner Luis A. Aguilar, Remarks at the Inaugural Meeting of the Equity Market Structure Advisory Committee (May 13, 2015), available at

[16] Commissioner Luis A. Aguilar, U.S. Equity Market Structure: Making Our Markets Work Better for Investors (May 11, 2015), available at

[17] Id.

[18] The Effects of Rebates and Fees on Order Routing, RBC (2015), available at

[19] Role of Exchanges in Well-Functioning Markets, Norges Bank Investment Management (Aug. 6, 2015), available at

[20] Tobias Adrian, Michael Fleming, Daniel Stackman, and Erik Vogt, Has Liquidity Risk in the Treasury and Equity Markets Increased?, Liberty Street Economics (Oct. 6, 2015), available at

[21] See, e.g., Sviatoslav Rosov, Liquidity in Equity Markets: Characteristics, Dynamics, and Implications for Market Quality, CFA Institute (Aug. 2015) (finding evidence that current U.S. equity market structure has created a set of incentives that increase adverse selection on lit exchanges), available at; PwC, Global Financial Markets Liquidity Study, 87 (Aug. 2015) (noting that, in global equity markets, “Trading volumes and transaction sizes have declined, indicating declining depth and immediacy.”), available at

[22] Tobias Adrian, Michael Fleming, Daniel Stackman, and Erik Vogt, Has Liquidity Risk in the Treasury and Equity Markets Increased?, Liberty Street Economics (Oct. 6, 2015), available at

[23] Robin Wigglesworth, Markets: Can they really be tamed?, The Financial Times (Sept. 30, 2015), available at

[24] Tobias Adrian, Michael Fleming, Daniel Stackman, and Erik Vogt, Has Liquidity Risk in the Treasury and Equity Markets Increased?, Liberty Street Economics (Oct. 6, 2015), available at

[25] It has been observed that systematic trading strategies account for only a fraction of the assets currently under management.  Robin Wigglesworth, Markets: can they really be tamed?, The Financial Times (Sept. 30, 2015), available at  But this figure masks the full impact of these strategies, because they account for a much larger portion of daily trading activity. 

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