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Statement at the Inaugural Meeting of the Market Structure Advisory Committee

Commissioner Daniel M. Gallagher

May 13, 2015

Thank you, Chair White.  I want to start by welcoming the members of the Committee and thanking you in advance for your hard work.  I also want to thank Trading and Markets – and Steve Luparello in particular – for all the hard work behind the scenes.  The task before the Committee -- to provide advice and recommendations to the Commission on equity market structure issues -- is of immense importance.  The need for fair and efficient equity markets is of paramount concern for investors, American businesses, and our economy as a whole.  Here at the SEC, it permeates each aspect of our mission. 

It has been over twenty years since the SEC last conducted a comprehensive market structure review[1] and nearly three since I first issued my call for the Commission to undertake a comprehensive market and regulatory structure review.[2]  Today’s inaugural meeting of the Market Structure Advisory Committee, I believe, is a watershed moment in the process of conducting this review.  

I hope and expect that the Committee will be able to avoid the pitfalls that so often plague financial regulators attempting the type of “big picture” review that lies before you today.  Specifically, it is my hope that you will avoid the incrementalism that leads regulators to attempt to solve each individual problem in a vacuum, leading almost inevitably to additional layers of regulation.  This approach exacerbates, and is exacerbated by, the regulatory tendency to treat all problems as failures of the markets themselves.  Approaching a comprehensive market structure review with an assumption that markets and their participants are the source of any perceived problems is, both intellectually and pragmatically, a dead end. 

I believe that the members of the Committee are well positioned to reject such blanket assumptions and instead recognize that many of the major market structure issues we face today have more to do with the unintended effects of regulation than failures of the markets themselves.  A thorough and credible review of market structure must acknowledge and address the role that regulation has played in developing the structure of today’s markets.  I urge you not to take anything for granted in your discussions.  Everything – including statutes, regulations, and interpretations – must be on the table.  There cannot be any sacred cows.  Instead, we need to be willing to go back to first principles. 

I hope that the Committee will not shy away from challenging the underlying rationales of the legislation and regulations that impact market structure and evaluating whether those rationales continue to make sense today.  Some statutes and rules, such as those governing the status of exchanges as self-regulatory organizations, were drafted to address markets that look nothing like those of today.  Others, like Reg NMS, were fatally flawed from the outset. 

Reg NMS in particular has come to stand as the Commission’s poster child for unintended consequences and the need for the Commission to institute retrospective reviews of its rules.  Although well intentioned, Reg NMS has distorted market structure much in the way Commissioners Atkins and Glassman warned it would in dissenting from the rule’s adoption.  Their joint dissent asserted that Reg NMS was a series of unnecessarily complex, non-market based rules.[3]  One needs to look no further than the staff’s most recent FAQs on Rules 610 and 611, which alone span forty-five pages, to vindicate their prediction of unnecessary complexity.[4]

I am therefore thrilled the Committee is starting its review with an examination of Rule 611 of Reg NMS.  One would be hard pressed to find a more perfect example of regulatory distortion of market competition. 

As a certain high-profile book recently stated, “The fragmentation of the American stock market was fueled, in part, by Reg NMS, which had also stimulated a huge amount of stock trading. . . . Essentially, the more places there were to trade stocks, the greater the opportunity there was for high-frequency traders to interpose themselves between buyers on one exchange and sellers on another.  This was perverse.”[5]

The trade-through rule creates distortions by assuming that price is all that market participants care about when buying or selling equities.  What makes the adoption of Rule 611 particularly frustrating is the fact that there exists a less complex and burdensome alternative to the trade-through rule, one which was recommended at the time by Commissioners Atkins and Glassman: a rule further clarifying a broker’s duty of best execution.[6]   I encourage the Committee to look at that and other alternatives to the trade-through rule and to review how FINRA implements its own best execution requirement for broker-dealers.

There are, of course, other aspects of Reg NMS and many other SEC rules ripe for the Committee’s review.  For example, I hope the Committee will assess Reg NMS’s flawed market data provisions and prohibitions on locked or crossed markets. 

And as the Committee expands its review, another area in desperate need of reevaluation is the SRO status of exchanges.  In focusing on exchange responsibilities and privileges, I strongly encourage the Committee to revisit the fundamental question of whether national securities exchanges should continue to be SROs.  The SRO framework was developed in the context of private, mutualized exchanges – a set of circumstances that no longer exist. The primary rationale behind SRO status was to leverage exchanges’ ability to provide regulatory oversight of their members.  Yet, a majority of the equities exchanges today outsource their regulatory obligations and market surveillance to FINRA, and FINRA’s board is increasingly filled with independent directors –which calls into question whether both the “self” and “regulatory” in self-regulatory organization are now misnomers. 

The status of exchanges matters because alternative trading systems are not subject to the same rules and restrictions as SROs.  ATSs, for example, do not face ownership restrictions and can change their operations without going through the formal and sometimes lengthy “Rule 19(b)” process.  As the exchanges continue to move away from self-regulation, the differing treatment of ATSs and SRO exchanges becomes more difficult to justify.  I hope the Committee does not shirk from discussing whether and how to level the playing field between SROs and ATSs, not by imposing more requirements on ATSs, but rather by lessening the burden on exchanges and reevaluating the benefits enjoyed today by exchanges under the securities laws.

We need to challenge the utility mindset that permeates federal securities law today – whether it is the notion of mutualized exchanges, the lack of competition for the clearance and settlement of equities and options or the monopolistic nature of SIPs.  These anachronistic ideas come to us from Congresses long ago and do not reflect markets today.  Any truly holistic review of market structure by the Commission should inevitably result in recommendations to Congress on how to update or eliminate the vestigial provisions.

Again, I want to thank the members of the Committee in advance for their commitment to performing a meaningful market structure review and providing the Commission with their advice, analysis and recommendations.  My door is always open and I look forward to engaging with all of you as your work proceeds.    

[1]           In 1994, led by Brandon Becker, the Division of Market Regulation released the Market 2000 Report.  The report was largely an evaluation of the principles underlying the 1975 Act amendments as they applied to the markets at the time.  See Division of Market Regulation at the U.S. Securities and Exchange Commission, Market 2000:  An Examination of Current Equity market Developments (1994), available at

[2]           See Daniel M. Gallagher, Market 2012:  Time for a Fresh Look at Equity Market Structure and Self-Regulation (Oct. 4, 2012), available at

[3]           See Dissent of Commissioners Cynthia A. Glassman and Paul S. Atkins to the Adoption of Regulation NMS, available at (“Regulation NMS Dissent”).

[4]           See Division of Trading and Markets:  Responses to Frequently Asked Questions Concerning Rule 611 and Rule 610 of Regulation NMS, available at

[5]           Lewis, Michael, Flash Boys (2014). 

[6]           See Regulation NMS Dissent.

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