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Remarks at the Inaugural Meeting of the Equity Market Structure Advisory Committee

Commissioner Luis A. Aguilar

U.S. Securities and Exchange Commission[1]

May 13, 2015

I want to welcome everyone to the first meeting of the Equity Market Structure Advisory Committee (“Committee”). I look forward to hearing your thoughtful and informed views on the topic of market structure.

Earlier this week, on May 11th, I publicly released a statement that discussed in detail certain key aspects of our equity market structure, particularly the issues of market fragmentation and competition for order flow.[2] I have shared this discussion with the members of this Committee, and I hope you will find it helpful. Given the length of that document, I thought it best to keep my remarks today brief.

Clearly, our equity markets have witnessed profound changes in recent years, and the result has been a market structure that is tremendously complex, highly interrelated, and constantly evolving. These characteristics make clear that any analysis of our markets is a challenging task. This underscores the critical role that this Committee will play in helping the Commission navigate the many difficult issues that have arisen in recent years.

Our current market structure embodies a series of trade-offs that elevate certain policy goals above others, and which benefit certain market participants more than others.[3] Some of these trade-offs are, perhaps, unavoidable. That doesn’t mean, however, that they cannot be managed and fully disclosed. I look forward to the Committee’s ideas on how these trade-offs should be addressed.

More importantly, as the Committee conducts its deliberations, I ask the members to keep in mind the indisputable fact that our equity markets need to be structured, first and foremost, to meet the needs of investors and issuers.[4] These market participants are the very reason our equity markets exist, and it is their interests that need to come first.

In fact, I urge the Committee to begin its deliberations by asking a simple question: How can our markets better serve investors and issuers? It is the answer to this question that should drive the Committee’s agenda. I further urge the Committee to view each of the issues it considers, not from the industry’s perspective, but from the perspective of investors and issuers. An analysis that begins with the needs of investors and issuers is the key to ensuring that the Committee’s discussions are not vulnerable to vested interests.

To that end, I cannot help but note that this Committee is composed mainly of representatives from the financial industry, rather than investors and issuers. Accordingly, for this Committee to fulfill our high expectations, it will be important for members who are affiliated with financial firms to check their business interests at the door, and focus on identifying a market structure that works for investors and issuers—not for their firms’ bottom lines. Simply stated, the Committee should focus on what’s good for investors and issuers and not on what market structure changes put more money in its pockets. This Committee is a form of public service, and public service is a public trust, one that requires us to place the public interest above our own personal gain.[5] I am a realist and recognize this won’t be easy, but I am sufficiently optimistic to believe that each of you will do the right thing.

And, clearly, we need your best and most objective guidance. Although our equity markets appear to be working well by many measures, there are some aspects of our markets that require immediate attention. Indeed, this is the very reason this Committee was convened. In my May 11th statement, I discussed some of the more pressing issues, such as:

  • The need to closely monitor whether the fragmentation of our equity markets is approaching a tipping point, where the rising number of lit and dark trading venues may be impairing our markets’ ability to discover prices efficiently.[6]
  • The importance of providing brokers with better guidance on how to deliver best execution in a highly decentralized marketplace that is dominated by speed-of-light trading.[7]
  • The importance of defending the order protection rule against efforts to limit its reach to exchanges that meet a certain market-share threshold.[8]
  • The importance of updating the rules governing the disclosure of order routing practices and execution quality, which have severely lagged industry developments.[9]
  • And, the need to develop a pilot program to test whether a limited trade-at restriction would improve market quality.[10]

These are some of the matters discussed in more detail in my May 11th statement. Of course, the statement was quite long with 184 footnotes so I’m leaving a lot out this morning. In deference to time considerations this morning, I’ll stop now.

But let me end by again thanking the Committee members for their assistance as the Commission tackles some of the most complicated issues confronting our markets today.

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

[3] See Larry Tabb, Can Reg NMS Be Fixed?, Tabb Forum (Oct. 2, 2013) (noting that “[f]ixing Reg NMS to solve all of the industry’s problems together is next to impossible. Depending on your role in the market, the rules can swing from significantly beneficial to very detrimental. Where you stand on the issues depends on where you sit.”), available at

[4] Lawrence Harris, Trading and Exchanges: Market Microstructure for Practitioners, 216-17 (2003).

[5] 5 CFR 2635.101(b)(1).

[6] Supra note 2 (citing the following: U.S. Securities and Exchange Commission, Equity Market Structure Literature Review Part I: Market Fragmentation (Oct. 7, 2013), available at; Hans Degryse, Frank de Jong, and Vincent van Kervel, The impact of dark trading and visible fragmentation on market quality (Jan. 2014) (finding that increased fragmentation across lit venues resulted in narrower spreads and increased depth), available at; Mahendrarajah Nimalendran and Sugata Ray, Informational Linkages Between Dark and Lit Trading Venues (Aug. 6, 2012) (finding that the advent of dark pools facilitates price discovery for liquid stocks by allowing informed agents to trade strategically across lit and dark venues, but that this does not hold true for illiquid stocks), available at; Maureen O’Hara and Mao Ye, Is market fragmentation harming market quality?, 100 J. Fin’l Econ. 459 (June 2011) (finding that increased off-exchange trading (i) does not impair liquidity or market information efficiency, (ii) led to lower effective spreads and execution speeds, and (iii) generally benefits small firms and does not harm large firms), available at; Sabrina Buti, Barbara Rindi, and Ingrid M. Werner, Diving Into Dark Pools, Fisher College of Business Working Paper Series (2011) (finding that increased dark pool activity is associated with narrower spreads, more depth, and lower short-term volatility, suggesting an improvement in price efficiency), available at; Christine Jiang, Thomas McInish, and James Upson, Why Fragmented Markets Have Better Market Quality: The Flight of Liquidity Order Flows to Off Exchange Venues (Nov. 2011) (finding that the diversion of uninformed trade flows to off-exchange venues improves price discovery on the lit exchanges, which become dominated by informed traders), available at; Ryan Riordan, Andreas Storkenmaier, and Martin Wagener, Do Multilateral Trading Facilities Contribute to Market Quality? (May 25, 2011) (finding that the arrival of ATSs in European markets contributed to the price discovery process and led to improvements in market quality), available at Notably, one study of European markets concluded that increased fragmentation across lit venues reduced price efficiency. Yet, this study ascribed this phenomenon to Europe’s lack of a consolidated tape, which the authors characterize as one of the “primary tools to minimize the potential harmful effects of trading fragmentation on market liquidity and price discovery process and to boost competition between trading venues.” Simone Francesco Fioravanti and Monica Gentile, The impact of market fragmentation on European stock exchanges, 7 (July 1, 2011) (finding that increased fragmentation across lit venues resulted in narrower spreads and increased depth), available at

[7] Supra note 2.

[8] ICE’s Six Recommendations for Reforming Markets, The Wall Street Journal, Moneybeat (Dec. 18, 2014)(“We believe fragmentation should be limited and that trading centers should meet a minimum threshold of 1% market share to be covered as a protected quote.”), available at; BATS Open Letter to All U.S. Securities Industry Participants (Jan. 6, 2015) (calling for the “implementation of a threshold of 1% market share before a market is considered protected under Regulation NMS or is eligible to participate in the national market system plans, a standard which would reduce fragmentation and market complexity.”), available at; BlackRock, US Equity Market Structure: An Investor Perspective, 2 (Apr. 2014) (“BlackRock encourages policy makers to examine whether exchanges should be required to maintain a minimum market share in order to retain ‘exchange status’ and any associated benefits.”), available at; Jingle Liu, Darren Marabello, Kapil Phadnis, and Gary Stone, Toxicity: It’s Not Just Reserved for Dark Pools, Bloomberg Tradebook (Nov. 22, 2013), available at

[9] Supra note 2.

[10] Id.

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