SEC Chair White gave a speech last week about “The Continuous Process of Optimizing the Equity Markets” in which she discussed the SEC’s equity market structure initiatives. Some of her remarks are copied below. Several key points include:
- CAT is expected to be finalized by the end of the year.
- Market stability and August 24 Trading Volatility – The SEC and SROs are “actively reviewing the operation of the limit up-limit down pilot plan” including “extensive public analysis by SEC staff… and the consideration of specific improvements to refine the plan’s operation.”
- Order Routing Disclosures – “as a complement to the Regulation ATS proposal” Chair White expects the SEC “to consider very soon a proposal to provide customer-specific institutional order routing disclosures and targeted enhancements to existing order routing disclosures for retail customers.”
- EMSAC – The EMSAC “is taking on the core issues that are key to our efforts to optimize our equity market structure… And I expect that the full Committee will vote soon on a formal access fee pilot recommendation.”
From Chair White’s speech:
…Today, I thought would briefly update you on the status of our equity market structure agenda – not only because it has been a priority of mine and the agency for the past three-plus years, but also because it has been a priority for the Commission throughout its history, and always will be. That history began, of course, in 1934 with the adoption of the Exchange Act, which for the first time gave our newly created agency sweeping powers over securities trading in the secondary markets, including broad authority over the primary participants in that market: brokers, dealers, and national securities exchanges. And since the early twentieth century, the Commission has been engaged in an almost continuous review of equity market structure, constantly seeking ways to improve and optimize its operation….
…The Commission is now in the midst of another significant phase of market structure review, as technology advancements continue to accelerate the pace of change in how orders are generated and executed. While these advancements have generally served retail and institutional investor interests well, as I have remarked before,  it is critical that we, as regulators, keep pace with these changes with a keen focus on the fundamentals driving them. We must fully understand the evolving marketplace, identify the issues with precision before making any fundamental changes, and assess the likely consequences that may follow.
The Commission’s continuing work in market structure is a substantial undertaking that requires updates in technology, and utilization of data and analytics to make informed decisions on enhancing market structure. That means new ways of using existing market data through tools like MIDAS, and it also means building new systems to provide even more powerful analytical capabilities for the Commission and our fellow regulators. That is why we have been moving forward on a proposed national market system plan to create a consolidated audit trail, which will be one of the world’s most comprehensive and sophisticated financial databases. That plan was put out for notice and comment in April and is expected to be finalized by the end of the year.
In addition to focusing on the need for robust data and enhanced regulatory capacity, through initiatives like MIDAS and CAT, I have also prioritized a number of other targeted initiatives to optimize our market structure—namely, ensuring the operational integrity of critical market infrastructures, enhancing market transparency and disclosures, and building more effective markets for smaller companies, to mention just a few. More will follow.
We have made much progress across this agenda by improving market stability through initiatives such as Regulation SCI (Security Compliance and Integrity), which strengthened the technology infrastructure of the market and expanded Commission oversight of that technology. We have also worked closely with the exchanges to address issues like order types and operations, data feed disclosures, and “single points of failure” within infrastructure systems that have the ability to significantly disrupt trading. We and the SROs are also actively reviewing the operation of the limit up-limit down pilot plan, with a focus on issues that occurred during the volatile trading of August 24, 2015. This review has included extensive public analysis by SEC staff of that day’s events and the consideration of specific improvements to refine the plan’s operation.
We have also taken action to address enhanced market transparency and disclosure with our proposal last November to update Regulation ATS. This proposal is designed to shed light on dark pools and bring greater transparency about how ATSs operate, including the material conflicts of interests they can pose for investors and other market participants. And, as a complement to the Regulation ATS proposal, I expect the Commission to consider very soon a proposal to provide customer-specific institutional order routing disclosures and targeted enhancements to existing order routing disclosures for retail customers. These two proposals would provide valuable new information to investors about how their orders our routed and executed in today’s markets.
We have also taken a significant step to do a data-driven assessment of how our market structure is working for smaller companies. In May 2015, the Commission approved a national market system plan for a two-year pilot program that will widen the minimum quoting and trading increments for stocks of smaller companies. This two-year pilot, which is scheduled to begin on October 3, 2016, will provide the Commission with valuable data on whether wider tick sizes would enhance the market quality for smaller company stocks for the benefit of issuers and investors.
In early 2015, as part of our broader market structure work, we created the Equity Market Structure Advisory Committee, comprised of diverse experts who consider specific initiatives and potential structural changes. The Committee was established to assist the Commission in its comprehensive review of the structure of the equity markets, and I have been very pleased with the progress of the Committee’s work over the past year. It is taking on the core issues that are key to our efforts to optimize our equity market structure. At their most recent meeting in April, for example, the Committee was presented with draft recommendations from two of their subcommittees for an access fee pilot and trading venue regulatory reforms. And I expect that the full Committee will vote soon on a formal access fee pilot recommendation.
As you can glean from my whirlwind summary of our market structure agenda, the Commission’s work throughout its history to promote fair, efficient and competitive markets continues with energy, thoroughness and the SEC’s characteristic focus on its mission. As I have said before, our work to optimize the equity markets is never finished. In order for our markets to remain the strongest and most reliable in the world, regulatory changes must be timely, effective, and informed – and a constant priority. Our current significant efforts are the latest in the Commission’s historical ongoing work to address the evolving market structure challenges. And we will continue to work hard and smartly to adapt and grow with the marketplace to better protect investors and to optimize the markets for the issuers who rely upon them. It is obviously one of the agency’s most important responsibilities.