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Remarks at the Inaugural SEC Equity Market Structure Advisory Committee Meeting

Commissioner Kara M. Stein

May 13, 2015

I would like to echo my colleagues and welcome you here to this inaugural meeting of the Equity Market Structure Advisory Committee.  It’s been a longtime coming, and I’m excited to finally convene with you and with my fellow Commissioners to start to tackle some of the tough issues.

This group is fairly large, and each of you has a unique perspective on the effectiveness and efficiency of our equity markets.[1]  Each of you has an important voice.   And yet, not every perspective is or can be represented at this meeting today. 

I urge each of you to focus on thinking about what we must do to improve the structure and operations of the U.S. equity markets on behalf of all Americans.  That is the true end goal. This includes considering and seeking out views from those not in this room today.  For example, while the discussions you undertake will focus on the market structure of stocks, there is no representative from a public company that issues the underlying stock. I think that we also have to be mindful that we do not have representation from retail brokerage.  We need to carefully consider these constituencies and interests as we move forward.     

History – Some Perspective on Today

Since today’s meeting is the first of this important new advisory group, I thought it important to put your work in the context of the broad sweep of the Commission’s efforts to develop an efficient, fair, and orderly market.

In the late 1960s and early 1970s, it became apparent that our securities markets were in need of an overhaul.   In response, Congress passed the Securities Act Amendments in 1975, also called the National Exchange Market System Act, which directed the Commission to work toward establishing a national market system.  The goals were clear:  improve the transparency of market quality information; improve the speed and efficiency of the market; promote fair trading; and ensure that orders get the best price. [2]

These were lofty and noble goals, and the SEC developed a series of rules to implement this vision. First, in 1978, the Commission issued rules requiring the public dissemination of quotes.[3]  Then in 1981, the Commission provided additional rules creating National Market System securities.[4]   Over time, the Commission issued a series of other rules and sought to keep the market structure rules up-to-date with the changing conditions.  Finally, in 2005, the Commission amended and consolidated its national market system rules into Regulation National Market System (Reg NMS).[5]

However, many believe that the markets have outpaced regulation.  Others have questioned whether the current market structure provides the best ecosystem for market participants, including investors and companies.  It is time to explore those questions about the current and future state of our equity markets.  In particular, whether the Commission’s existing regulatory framework needs to evolve to deal with the transformations occurring in our markets as a result of the new technologies and methods of communication. 

Reg NMS - A Lot Can Happen in Ten years 

Today’s agenda begins with an examination into Regulation NMS.  Since the implementation of the rules that comprise Regulation NMS, there has been vigorous and ongoing debate regarding its effectiveness.   However, there is no debate that the enactment of Reg NMS has altered and transformed how our equity markets function.  

The Commission adopted Reg NMS nearly ten years ago.  A lot has changed in ten years.  In 2005, mobile phones were not yet smart [phones] and the VCR was the most popular home entertainment device; laptops weren’t yet popular and only a few had access to Wi-Fi.[6]   In 2005, the New York Stock Exchange (NYSE) executed nearly 80% of the consolidated share volume.  Today, no single stock exchange executes more than about 20% of the consolidated share volume.[7]   Today, nearly twenty percent of the dollar volume of NMS securities takes place on alternative trading systems not on exchanges, and that number is on the rise. 

The volume and complexity of today’s securities markets is unprecedented with activity spread among exchanges, alternative trading systems, and broker-dealer internalizers.  The transformation of our markets can also be seen in daily order audit trail system (OATS) reports.  As many of you are well aware, OATS reports can be a fairly good indicator of the increase in the complexity of order flow.   Between 2005 and 2015, the average number of daily OATS reports for Nasdaq-listed and Over the Counter-quoted securities increased over 700 percent, from approximately 107 million in 2005, to 868 million in 2015.    In addition, the average daily number of all OATS reports (all NMS Stocks and OTC securities) has more than doubled over the last four years, increasing from 1.487 billion in the fourth quarter of 2011, to 3.151 billion in the first quarter of 2015.[8]

If this is where we’ve come in just the last ten years, where will we be in next ten years?

Some Questions for Today and Tomorrow

While rapid advances in communications, technology, globalization, and changes to the Commission’s own rules have brought dramatic improvements to many aspects of our equity markets, they also have brought about new structures and practices that raise serious questions about market efficiency, fairness, resilience, and capital formation. 

Today’s market structure has both strengths and weaknesses, and I hope that this Committee discusses both equally.  Today’s agenda considers one NMS Rule – the Order Protection Rule (Rule 611 of Regulation NMS).   This is an important starting place, and it is a good way to begin.  

I also have a few questions I hope you can explore as the Committee moves forward.  Does the Commission’s regulatory approach to market structure continue to make sense in the current environment?   What incentives are at work?  What incentives drive off-exchange trading?   What factors contribute to complex order routing and handling?  How could better disclosure and transparency result in benefits for all market participants?  How should the Commission approach conflicts of interest? How can data and audit trails support a better functioning market?  And how do our markets interact with other markets out there, like the futures markets?  Finally, when considering equity market structure, it’s far too easy to lose sight of the forest for the trees.  

I hope you will continually ask some of the broad, big picture questions that underlie our current market architecture.   Is the market fair? Is the market efficient? Is the market supporting capital formation?  If not, what are some new ways to re-think market structure given all the current disruptions?   I look forward to listening to the Committees work and today’s discussion.  

I want to thank each of you for the time that you are dedicating to this Committee of the Commission and on behalf of the American people.  My hope is that the Committee’s work and insights will lead us not to look at the past, but to look forward to the year 2025 and beyond.   

[1] Securities Exchange Act Release No. 74092, Equity Market Structure Advisory Committee (Jan. 20, 2015), available at

[2] See Securities Industry Study of 1973 (Senate Rept. 93-101, 1973) and Section 11A of the Securities Exchange Act of 1934;   “The linking of all markets for qualified securities through communication and data processing facilities will foster efficiency, enhance competition, increase the information available to brokers, dealers, and investors, facilitate the offsetting of investors’ orders, and contribute to best execution of such orders.”  (15 U.S. Code § 78k–1).

[3]  Securities Exchange Act Release No. 14415 (January 26, 1978), 43 FR 4342 (February 1, 1978).

[4] Rule 11Aa2-1, Securities Act Release No. 17549 (February 17, 1981), 46 FR 13992.

[5] Securities Exchange Act Release No. 34-51808, Regulation NMS (June 9, 2005), available at

[6] Pew Research Center, Possession of Electronic Devices; see

[7] NYSE’s reported market share of trading in NYSE-listed stocks declined from 79.1% in January 2005 to 25.1% in October 2009.  See Concept Release on Equity Market Structure, available at; no single stock exchange executed more than approximately 20 percent, see market volume statistics reported by BATS, available at

[8] Financial Industry Regulatory Authority (FINRA).

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