Remarks at the Meeting of the Equity Market Structure Advisory Committee

Good morning and welcome to this meeting of the Equity Market Structure Advisory Committee. Today’s agenda covers recommendations that have come from the hard work of two of the Advisory Committee’s subcommittees.

In May 2015, at its inaugural meeting, this Committee began its examination of Regulation NMS, and in particular, the “Order Protection Rule”. This rule is one of twelve that collectively make up Regulation NMS.

Today, the Committee continues that examination and will discuss its subcommittees’ recommendations. At the time Rule 611 was adopted, the Commission noted that many internalized trades were small trades made by or for retail investors and that nearly 1 in 30 of such trades was executed at a price inferior to readily available quotes in the lit venues. Accordingly, Rule 611 restricted trades at prices that were worse than a protected quotation.

In the years since the adoption of Regulation NMS, our markets have changed dramatically. Trading volumes have increased while the average trade size has decreased. Market fragmentation has increased significantly. In addition to 21 registered securities exchanges, there has been an increase in dark pool ATSs and other off-exchange venues such as broker-dealer internalizers. The substantial increase in trading on dark venues means that displayed limit orders interact with a much smaller percentage of volume today than they did prior to Rule 611.

The Committee and its work provides us with an opportunity to re-examine the purpose behind Rule 611 — what was it for? The purpose behind Rule 611 was to ensure that investors do not get inferior prices in a complex, fragmented market. Essentially, it’s a principle-based rule that sets forth a floor — that investors get best execution.

This raises a number of questions in my mind:

• Do today’s investors still need this particular protection?
• What are the incentives in today’s markets that impact routing and execution?
• How do those incentives affect behavior in today’s markets? How are we measuring it?
• What are the pros and cons of changing Rule 611 prior to modernizing the Commission’s order execution and order routing disclosures?

I look forward to hearing from today’s panel and the subsequent discussion about whether and how Rule 611 should be changed.

The second item on the Committee’s agenda is the Trading Venues Regulation Subcommittee’s preliminary recommendations concerning SRO liability limits and regulatory centralization.

As our markets have grown more complex and automated, we have seen technical glitches that have impacted both the markets and market participants. The subcommittee’s first recommendation concerns how SROs compensate those harmed by such errors.

The subcommittee’s second recommendation deals with the best way to surveil the modern markets. The markets today are increasingly interconnected. And, just as the markets have evolved, so too must market regulators. Is there a better, more efficient way to identify misconduct occurring across markets? I look forward to the Committee’s discussion on the best way to conduct cross-market surveillance in the era of automated trading and the inception of the Consolidated Audit Trail.

After the two panel discussions, we will also hear status reports from the Market Quality and Consumer Issues subcommittees. I am interested, in particular in the Market Quality subcommittee’s current analysis of the Tick Size Pilot. How is it going?

As I have said in the past, I very much appreciate the time and attention that each of you has dedicated to the important work of this Committee.

This work requires you to put your own business interests aside and to think through solutions for the good of our markets as a whole.

I am counting on you — and the American people are counting on you — to recommend improvements to our equity market structure for the benefit of all.

I look forward to today’s analysis and discussion, and your thoughts regarding what is best for our markets.