SEC Proposes Equity Market Structure Changes

In December, the Securities and Exchange Commission proposed four new rules that would make significant changes to Regulation Best Execution, order competition and auctions, order execution disclosure, tick size and maker-taker fee caps. A Goodwin client alert notes that, “the market structure proposals would significantly alter the processes, decision-making, and economics for brokers, dealers (including wholesalers), ATSs, and exchanges in several predictable and unpredictable ways” while also having an impact on retail and other investors. See below for links to each proposed rule and a brief summary of what each proposal would impact if adopted.

• Regulation Best Execution: Regulation Best Execution would apply to all securities and require all broker-dealers to use reasonable diligence to ascertain the best market for a security and buy or sell in such market so that the resultant price to the customer is as favorable as possible under prevailing market conditions, subject to specific exemptions. Click here to view an SEC fact sheet covering the proposal.
• Order Competition and Auctions: The proposed rule would prohibit a “restricted competition trading center” such as a wholesaler from internally executing “segmented orders” – orders for NMS stocks that are made for an account of a natural person or an account held in legal form on behalf of a natural person or group of related family members and in which the average daily number of trades executed in NMS stocks was less than 40 in each of the six preceding calendar months – unless the orders are first exposed to competition in a “qualified auction” operated by an “open competition trading center.” Click here to view an SEC fact sheet covering the proposal.
• Order Execution Disclosure: The proposal would amend Rule 605 of Regulation NMS to expand the scope of entities included (certain broker-dealers, single-dealer platforms, entities that operate certain qualified auctions), amend the definition of a covered order, amend information and metrics covered in 605 reports, require a summary report, and require new statistical measurements of order execution quality. Click here to view an SEC fact sheet covering the proposal.
• Tick Size and Maker-Taker Fee Caps: The proposal would establish variable minimum pricing increments for quotations and orders in certain NMS stocks, reduce the access fee caps for protected quotations in certain NMS stocks, and accelerate the implementation of previously-adopted round lot and odd-lot information definitions, among other changes. Click here to view an SEC fact sheet covering the proposal.

The Commission will hold the comment periods for each proposal open until March 31, or 60 days after the date of publication in the Federal Register, whichever is later. At the same open meeting, the Commission also adopted amendments to Rule 10b5-1 for permissible insider trading plans, adding conditions to affirmative defenses and creating new disclosure requirements.

Click here to read a comprehensive client alert on the four SEC rule proposals from Goodwin.