In a recent speech, SEC Chair Mary Jo White outlined her plans to bring market regulation in line with today’s methods of trading. As part of the initiative, Chair White recommended that the Commission create a Market Structure Advisory Committee to review rule proposals and other initiatives.
Chair White articulated the core principles that would guide the Commission’s review of market structure issues which include:
- Evaluating the issues “through the prism of the best interest of investors and the facilitation of capital formation.”
- Recognizing the diversity of companies and products in the marketplace and not imposing a one size fits all mentality.
- Undertaking a comprehensive review of market structure issues, including revisiting past decisions.
She reminded the audience that, by and large, the equity markets are strong and serve the interests of investors; however, she acknowledged that some issues remain that should be carefully addressed. In order to address the market challenges, she described an ambitious agenda to address five broad areas where the Commission will focus its efforts:
- Market instability and disruption caused by technology risks. She outlined the steps the Commission has already taken to address these issues and committed to stay focused on new challenges that arise in this area.
High frequency trading. Chair White stated that the Commission is assessing “the extent to which specific elements of the computer-driven trading environment may be working against investors rather than for them.” The Commission’s review will include a focus on “the use of aggressive, destabilizing trading strategies in vulnerable market conditions.”She stated that she has asked that the staff develop a recommendation “for an anti-disruptive trading rule” narrowly tailored to address market stability issues in short time periods. In addition, she has requested that the staff develop a rule proposal that would subject unregistered proprietary traders to the Commission’s rules regulating dealers and another that would eliminate the current exemption from FINRA membership for dealers that trade in off-exchange venues. She also has asked the staff to recommend ways to improve regulatory oversight of trading algorithms as well as ways that the Commission can improve firms’ risk management of those algorithms. The exchanges will also be an integral part of the Commission’s agenda in this area, including considering whether to include a time stamp in consolidated data feeds and potential disclosure of how they use data feeds.
- Fragmentation. While recognizing that broadening the number of trading venues available can have certain benefits, Chair White expressed concern that these choices also can raise other challenges including interconnectedness and the increased use of dark venues. In addition to FINRA’s current efforts in this area, she also stated that she has asked the staff to work on supporting FINRA’s current efforts in this area, she also indicated that she has asked the staff to develop recommendations to expand the information that alternative trading systems provide to the Commission and to make that information available to the public. In addition, she stated that the Commission would continue to examine other issues in this area to determine how well the Commission’s regulations address the realities of today’s markets.
- Broker conflicts and how those are affected by different trading venues. She reminded the audience that the SEC has and will continue to use its enforcement power to address these issues. In addition, she stated that she has charged the SEC staff with developing a recommendation for a rule that would enhance order routing disclosures and asked the exchanges to conduct a comprehensive review of order types and how they operate.
- Quality of markets for smaller companies. She described the staff’s work on the pilot program that would allow wider tick sizes for small companies and stated that this effort would likely inform the Commission’s other efforts to serve smaller issuers.