James R. Burns
Deputy Director, Division of Trading and Markets
U.S. Securities and Exchange Commission
Feb. 5, 2013
Good morning. I am Jim Burns, Deputy Director of the Division of Trading and Markets at the SEC.1 On behalf of Chairman Walter and Acting Director Ramsay, who are traveling today, it is my pleasure to welcome all of you to the Commission’s Roundtable on Decimalization. We are pleased that you have been able to join us for what we anticipate will be informative and productive discussions.
At the outset, I especially want to thank the panelists who have agreed to participate in today’s three panels. They have generously offered their time and expertise to help the Commission assess a topic of great importance for investors and economic growth.
In particular, today’s over-arching topic is whether the current tick size regime in the U.S. equity markets can be enhanced to more fully promote such vital public policy objectives as fair and efficient trading, the protection of investors, and vigorous capital formation.
Today’s panels will tackle this topic in three parts. The first panel will focus on tick sizes as they affect small and mid-cap companies. The second will consider tick sizes with respect to the equities markets more generally. And after a break for lunch, the third panel will focus on ways to generate useful data that would enable the Commission to evaluate tick size issues in as disciplined and responsible manner as possible.
Among other things, the third panel will address whether a pilot program might be implemented that would assign varying tick sizes to a control group of stocks of different types of companies. The objective of such a pilot program, as well as other potential means of generating useful data, would be to establish a solid empirical basis for any action that the Commission might determine to take, or not to take, in the future.
We are optimistic that a data-driven approach can be developed that will prove fruitful for addressing tick sizes and that this type of data-driven approach provides a useful template for addressing many of the other complex and pressing market structure issues that currently face the Commission.
The Commission has already, of course, taken a number of very important steps in recent years to improve equity market structure. These include:
- New single stock circuit breakers that impose a brake on extraordinary price movements. These circuit breakers will be enhanced when the Limit Up/Limit Down Plan is implemented in April.
- Updated market wide circuit breakers, also to be implemented in April, that apply across the equity, options, and futures markets.
- A new Market Access Rule that requires broker-dealers to implement controls and supervisory procedures to manage the financial and regulatory risks of market access, including the risks of errant trading algorithms that could seriously disrupt the markets.
- Updated SRO rules that provide more transparent and objective standards for when trades will be broken.
- And new SRO rules that strengthen the minimum quoting standards for market makers and effectively ban “stub quotes.”
The Commission also has taken a number of steps to enhance its institutional capabilities for regulating high-speed, high-volume electronic markets. These include:
- The new Consolidated Audit Trail Rule, which, when implemented, will enhance regulators’ capabilities to obtain data on market activity down to the level of individual orders from individual accounts.
- A new Large Trader Rule, which provides regulators with better information concerning the identity and conduct of active traders.
- A new technology system, called “MIDAS,” that collects and facilitates useful analysis of the massive amount of market data generated in today’s markets.
- And, to use all of these new data tools more effectively, the SEC has hired additional personnel throughout the agency with specialized quantitative and trading expertise.
I believe that all of these initiatives have already begun to or will in the future strengthen the U.S. equity market structure. But there is, of course, more to be done. In addition to the tick size issues that we will be discussing today, there are many others relating to market structure and the conduct of market participants that we should further examine.
Indeed, many of these issues were raised in the Commission’s 2010 Concept Release on Equity Market Structure. As you know, the U.S. equity markets have experienced an extraordinary transformation over the last several years. We now have fully electronic, high-speed markets in which many different types of trading venue compete intensely for order flow.
Given these changes, the Concept Release asked for comment on a wide range of issues. One of which, for example, will be discussed today. In particular, the Commission noted that small company stocks may trade differently than large company stocks. It requested comment on how the current market structure performs specifically for smaller companies and whether the market structure adequately supports the capital raising function for these companies.
The Concept Release also inquired about high frequency trading firms, the tools and strategies they use, and their effects on market quality and investors. Another important group of issues in the Concept Release related to dark liquidity in all of its forms and its effects on market quality and investors.
The Commission received many thoughtful and detailed comments responding to the Concept Release. In general, the comments reflected sharply conflicting views on the extent to which there are serious problems with the current market structure and on the nature of any regulatory responses that might be needed to address problems.
We keenly understand the pressing need to address these issues responsibly. Those who are critical of the current market structure understandably would like to see action taken to address their concerns. Conversely, those more supportive of the current market structure just as understandably would like to see some resolution of disputed issues to help dispel what they believe are unjustified criticisms.
And this need for resolution implicates a core element of successful equities markets – investor confidence in their fairness and integrity. No market structure can determine whether equity prices ultimately will rise or fall, but a good market structure should inspire confidence in investors that they will be treated fairly and efficiently. And in this regard, the perception of investors is in certain ways as important as the underlying reality. A market structure must both be good and be perceived as good by investors. If not, the U.S. equity markets will not fully achieve the objectives of promoting economic growth and capital formation.
The most promising path forward is to adopt a data-driven approach that will provide a solid empirical basis for the Commission to address open issues and determine what, if any, regulatory actions are appropriate and how they might best be calibrated.
In this regard, some of the commenters on the Concept Release submitted data to support their views. And since the Concept Release, there has been a surge in academic and other studies of market structure issues. Indeed, we have collected well over 100 papers from a two-year period that employ data analysis to examine the current U.S. equity market structure. Moreover, as noted earlier, the Commission itself is acquiring data and quantitative resources that should further enable a deeper understanding of market structure quality and dynamics.
In sum, we hope and expect that the Commission will benefit in the coming months from all of these sources of empirical research. Today’s discussions on tick sizes are an excellent example of pursuing the type of approach that also should enable progress on a wide range of other issues.
The Securities and Exchange Commission, as a matter of policy, disclaims responsibility for any private publication or statement by any of its employees. The views expressed herein are those of the author and do not necessarily reflect the views of the Commission or of the author’s colleagues upon the staff of the Commission.