Opening Remarks at the Equity Market Structure Advisory Committee Meeting
Chair Mary Jo White
April 26, 2016
Good morning and welcome. Thank you all — members and panelists — for participating in today’s meeting. Let me begin my remarks by noting how impressed I am with the engagement and progress of this Committee in tackling the issues that are central to optimizing equity market structure. Your agenda for today and the documents made publicly available by the four subcommittees clearly reflect thoughtful analysis and recommendations. The full Committee will be considering specific recommendations from two subcommittees today and receiving status reports from two other subcommittees.
Recommendations from the Regulation NMS and Trading Venues Regulation Subcommittees
The Regulation NMS Subcommittee and the Trading Venues Regulation Subcommittee are both presenting recommendations for consideration by the full Committee today. They are: (i) a proposed framework for an access fee pilot that would measure the impact of reduced access fees on current equity market structure; and (ii) several recommendations for changes to the current trading venue rules on self-regulatory organization (SRO) immunity, NMS Plan governance, changes in the SRO proposed rule process when technology changes are also required, and the centralization of common regulatory functions. All of these recommendations follow independent analysis by SEC staff available on the Committee’s webpage, presentations and advice from an array of panelists, and discussions at prior public meetings. I am very pleased to see this progress.
Discussion and consideration of the subcommittees’ recommendations are the next step, which I know will be well-informed by the thorough analysis of the subcommittee members, the full Committee’s views, and by the views of the knowledgeable and diverse panelists invited to present at the meeting today. As you know, I am fully committed to pursuing market structure reforms that enhance our markets and are driven by data and careful analysis. This Committee’s current deliberations regarding an access fee pilot for the production of data that would inform more permanent market structure changes is consistent with that important principle and approach. Of course, implementation of any access fee pilot would require both Commission approval and the significant participation and cooperation of the SROs.
For my part, I believe a properly designed access fee pilot would be an appropriate step in furthering our collective assessment of this significant aspect of our current market structure. However, as is evident from the recommendation to be discussed today, there are significant issues in any access fee pilot that require close scrutiny and thorough planning. I am particularly interested in hearing more about the views on certain of the elements of the recommended pilot.
I will quickly mention four. First, a “de minimis bucket” of securities subject to a two mil fee cap is addressed. What is the thinking about the possibility of having a group of securities for which access fees and rebates would be prohibited altogether? What are views about a de minimis approach versus a no fee and rebate approach? Would the de minimis approach compromise the goal of generating data to determine the impact of access fees on our market structure?
Second, I am interested in hearing discussion about whether the pilot should apply to non-displayed liquidity and off-exchange trading venues, such as alternative trading systems. As the recommendation recognizes, Commission Rule 610 only imposes access fee caps on exchange displayed liquidity, as market participants are prohibited from “trading through” such quotes when they are protected. What would be the relevant considerations for expanding a pilot program to quotes and venues that are not subject to the access fee cap today?
Third, the recommendation does not include a “trade-at” provision, noting that one purpose of the access fee pilot is to assess whether a “trade-at” provision is needed and further noting that “trade-at,” while intertwined with access fees, concerns a different market structure issue. I look forward to hearing the perspectives on this issue and more about the rationale for the recommended choice.
Finally, to return to the data-driven nature of our review, what is the optimal timing for an access fee pilot? The primary purpose of an access fee pilot is to generate data about impact on liquidity and market behavior. In light of the fact that the tick size pilot is scheduled to begin on October 3, is there any concern that the utility of any data produced from an access fee pilot would be degraded if the two pilot programs were to run in tandem, or can the access fee pilot be designed to avoid that?
I am also very interested in today’s discussion regarding the trading venue regulation recommendations. In the interest of time, I won’t highlight any specific recommendation or questions, but I look forward to a robust discussion concerning the concrete measures proposed, including how they would mitigate inherent conflicts of interest.
Updates from the Customer Issues and Market Quality Subcommittees
Later this afternoon, the Customer Issues Subcommittee and Market Quality Subcommittee will be providing updates on the significant issues they are considering. It is clear from the written reports that both subcommittees have begun to coalesce around a number of potential recommendations. Among other topics, the Market Quality Subcommittee has been actively reviewing how the U.S. equity markets operated during the volatility of August 24, 2015 and what may flow from what was observed. The Customer Issues Subcommittee is considering a range of potential enhancements to our current rules requiring disclosure of execution quality and routing information, with a particular focus on retail investors.
This work is both critical and timely, as the industry and regulators also continue to consider these issues and possible changes to existing practices. As described in an earlier meeting, for example, the Commission staff has conducted an extensive analysis of the events of August 24, exploring a range of issues, including: the opening and reopening processes at the primary listing exchanges; the effects of market volatility on trading in certain exchange-traded products (ETPs) and corporate stocks; the operation of the limit-up/limit-down (LULD) pilot plan; and the specific reasons behind the number of trading pauses in ETFs.
I am pleased to see that the Market Quality Subcommittee is keenly focused on these and related issues. As you know, the Commission late last week extended the LULD pilot period for one year and specifically recognized the ongoing work being conducted by the LULD participants to further refine the plan’s operation. That work includes considering: (i) the harmonization of current clearly erroneous execution rules with the Plan; (ii) a review of ETPs to determine whether adjustments should be made to LULD to account for their particular trading characteristics; (iii) potential enhancements to the categorization of securities into different tiers; and (iv) a review of other issues that may have arisen during the events of August 24, 2015, including the impact of double-wide price bands during the opening period and the advisability of coordinated reopening procedures. I am confident that this Committee, with the able engagement of the Market Quality Subcommittee and the advice of expert panelists, will provide valuable input to the Commission and the plan participants on LULD and related trading rules.
You will also hear this afternoon from the Customer Issues Subcommittee on issues related to execution quality and order routing disclosures. As you know, Commission staff has been directed to focus on improvements to our Rule 606 routing disclosures, with a particular focus on institutional order routing disclosures and discrete enhancements to the existing retail order routing information provided by broker-dealers today. I expect the staff’s recommendation will be considered by the Commission in the very near future. I look forward to the Customer Issues Subcommittee’s report on their consideration of the issues in this area.
Today’s robust agenda demonstrates the importance of gathering a diverse set of market participants to address complex, potentially very significant market structure issues. As I have said before, while we do not require perfect solutions, our regulatory changes must be informed by clear-eyed, unbiased, and fact-based assessments of the likely impacts — positive and negative — on market quality for investors and issuers. Continued engagement by this Committee and all market participants on the range of potential issues is critical.
Thank you again for all the time and effort you are committing to this Committee.