In December last year the Securities and Exchange Commission made four proposals to change US market structure. The proposals that were put out for comment included updating Rule 605 which covers data disclosure enhancements for all market participants; changing tick sizes and access fees; achieving best execution; and increasing competition for orders. 

The Financial Markets Quality Conference, hosted by the Psaros Center for Financial Markets and Policy at Georgetown University, on 15 November included a panel discussion on these proposals. 

Jim Angel, associate professor of finance at Georgetown University McDonough School of Business, said on the panel that the problem with the SEC’s proposed reforms is that nobody is looking at how they all go together. He added: “It’s really too much, too fast.”

Sapna Patel, head of Americas market structure & liquidity strategy at Morgan Stanley, agreed on the panel that the four SEC proposals are interconnected, and so they cannot be looked at in isolation. 

“The question that I ask when you see a fundamental change, like the one contemplated, is what problem are we trying to solve because our markets are fairly efficient,” she added. “I think we should take a step back and be careful about breaking something that works for investors.”

Patel was working at the SEC during the last major changes to US market structure with the introduction of Reg NMS in 2005 when the regulator had been trying to solve the move from fractions to decimals, the rise of electronic trading and Nasdaq  filing for exchange status. At that time the SEC engaged with the industry as it recognised its proposals were all interconnected. The regulator held a public hearing for the industry and then changed the proposed rules before gradually rolling them out.

“Today we have four individual proposals without any thought given to how they impact each other,” said Patel. 

Hope Jarkowski, general counsel at New York Stock Exchange, continued on the panel that there is broad support for Rule 605, which will add transparency, and the best execution rule but the other two proposals are controversial.

Jeffrey O’Connor, head of market structure, Americas, at Liquidnet, said in a report in October that there is an overabundance of negativity around the proposals, from all walks of the industry. He highlighted that during Gary Gensler’s time as chairman of the SEC, there have been 47 proposals versus 19 and 22 during the two previous administrations. 

O’Connor said: “The current aggressiveness is leaving most market participants perplexed, citing lack of purpose or justification.”

Tick size reform 

Jeffrey Davis, senior deputy general counsel at Nasdaq, said on the panel that a consensus seems to be developing around tick size reform and allowing a half penny tick size, which Nasdaq has been advocating for a long time. 

“We have continuously said it should be done in an incremental and careful way,” he added. “Our concern was that the proposal went too far and too fast.”

Patel agreed that allowing tick sizes below a penny addresses a market structure problem.

Davis continued that tick size reform is the only proposal that focuses on strengthening and deepening the NBBO (National Best Bid and Offer), which is critical for all aspects of market performance.

Volume tiered pricing 

Another proposal that has generated controversy is banning exchanges from offering tiered pricing based on trading volumes for customer flow, although it would be allowed for proprietary flow. 

Patel said the SEC seems to believe that brokers are conflicted and routing to the exchanges in their own interest rather than their customers, and pocketing the money, and that smaller brokers and exchanges cannot compete. However, firms such as Morgan Stanley pass on fee rebates to their customers and smaller broker-dealers that are not able to be members of every venue use Morgan Stanley’s scale and connectivity for market access.

Davis argued that volume-based pricing is a universally accepted economic principle. 

“It is rational economic behavior and one of our best tools for creating the NBBO by incentivizing market participants to display liquidity,” he added. “We are very concerned that we can’t compete on price with off-exchange venues.”