Testimony Archives
Written Submission
On Behalf of the
Securities Industry Association
Committee on Banking, Housing and Urban Affairs
United States Senate
Hearing on Regulation NMS and Developments in Market Structure
July 22, 2004
Introduction
The Securities Industry Association commends you for holding this hearing and appreciates the opportunity to submit testimony on the important topic of the Securities and Exchange Commission's ("SEC") proposed Regulation NMS and developments in market structure.
Our nation's securities markets have long been the most transparent, liquid, and dynamic in the world. New forms of competition, technology, global growth in trading, and broader investor participation are only a few of the trends that have driven phenomenal changes in the capital markets and the securities industry over the past decade. The periodic re-evaluation of market structure is therefore vital to maintaining our global preeminence and to ensuring that investors are fully protected.
The SEC has demonstrated extraordinary vision and leadership in exploring reforms that will strengthen the qualities of U.S. equity markets that benefit investors. The Commission's recent review of market structure issues resulted in the issuance of proposed Regulation NMS on February 26, 2004. Regulation NMS includes four distinct proposals: 1) trade-through regulation; 2) intermarket access; 3) quoting in sub-penny increments; and, 4) market data reforms. The discussion stimulated by these proposals comes at a crucial stage in the evolution of the U.S. securities markets, and thus provides a special opportunity to promote even greater market efficiency and quality for all market participants.
SIA assembled two working groups that represented a broad range of our members to examine the regulatory issues presented by the Regulation NMS proposals. These working groups were drawn from SIA's Market Structure, Trading, and Federal Regulation Committees as well as the Market Data Subcommittee of SIA's Technology and Regulation Committee. After several months analyzing the Regulation NMS proposals, the committee reached its conclusions and made recommendations to the SEC in a June 30, 2004 comment letter (included in its entirety as Attachment #1, pg. 6). We encouraged the Commission to incorporate these recommendations when formulating any final rules.
Before summarizing our recommendations for you, I would like to highlight certain principles identified by SIA as vital to modern market structure:
Foster Investor Protection.
Investor protection has been a cornerstone of the U.S. securities laws since their enactment in the 1930s. The Securities Exchange Act of 1934 clearly sets forth this important goal, stating that it was adopted "to insure the maintenance of fair and honest markets." Any regulatory approach must continue to make sure that the public is protected, thus allowing the U.S. markets to flourish.
Encourage Fair Competition.
Free markets and a competitive environment should determine the fundamental structure of the securities markets. Any regulation should be sufficiently flexible to avoid stifling the development of new trading practices and technological innovations by competing market centers.
Promote Efficient Intermarket Trading.
We advocate regulatory measures that will facilitate the goal of efficient intermarket trading. In particular, we believe that fostering effective intermarket executions and enhancing market access will ensure that all investors' orders – both retail and institutional – are executed in the manner most beneficial to the investor.
Maintain Fair and Orderly Markets.
We believe that any new regulation must contribute to the maintenance of fair and orderly markets, a primary objective of Congress in mandating the national market system.
Support Equal Regulation.
We believe there should be fair and consistent regulation across market centers. Therefore, we agree with the Commission's expressed intent in the Regulation NMS proposing release of furthering the statutory objective of assuring equal regulation of the markets.
Ensure Quality and Fairly Priced Market Data.
As the basis for effective price discovery and the successful functioning of the U.S. securities markets, we believe that market data must be both of high quality and cost-effective.
These principles formed the basis of our deliberations on the Regulation NMS proposals and, ultimately, of our conclusions regarding the proposals. The following is a brief summary of our recommendations.
(1) Intermarket Price Protection
SIA recommends that intermarket price protection apply to those best bids and offers that are firm and accessible across all market centers for all Nasdaq and listed stocks. To address certain practical trading issues, SIA also advocates certain exceptions to this general intermarket price protection rule, including exceptions for those who choose to opt out (provided such an exception does not include the requirements to provide the national best bid or offer ("NBBO") or order-by-order disclosure), intermarket sweep orders, large block trades, benchmark trades, trades within a de minimis three-second window, and other miscellaneous items. SIA believes that such intermarket price protection is in the best interest of investors because it fosters accurate price discovery, facilitates market integrity, and encourages technological innovation.
(2) Intermarket Access
SIA believes that efficient intermarket access is critical not only for any intermarket price protection rule but also for the markets in general. We therefore applaud the Commission's focus on the various aspects of such access: linkages and connectivity, access fees, and locked and crossed markets. Our positions on these issues are as follows:
Linkages/Connectivity.
SIA favors the Commission's proposed market access standards for private linkages, but believes that there are unresolved issues related to certain small or relatively inactive markets.
Access Fees.
SIA supports the Commission's efforts to resolve the long-standing issues regarding access fees, but our member firms are divided over the optimal solution. Some members view the SEC's de minimis access fee proposal as a fair compromise, while others continue to consider such a solution as inappropriate. Nonetheless, there is general support regarding the need for some regulation of access fees associated with quotes that are hit by orders routed away to obtain access to the NBBO to fulfill intermarket price protection obligations.
Locked and Crossed Markets.
SIA supports the SEC's proposed rule to minimize locked and crossed markets, subject to certain additional exceptions.
(3) Sub-Penny Quoting
SIA supports the Commission's proposed ban on sub-penny quoting, as we are concerned with the various adverse effects of sub-penny pricing – such as stepping ahead, loss of depth, and decreased price clarity.
(4) Market Data
We recognize the Commission's efforts to explore important market data issues since 1999, which included the creation of the Advisory Committee on Market Information chaired by Professor Joel Seligman. We are concerned, however, with the fact that the Commission's Regulation NMS market-data proposal focuses exclusively on the allocation of market data revenues, instead of seeking to also address many related, underlying issues. SIA believes that the level of fees charged for consolidated market data is a critical market structure issue that should be addressed now. We believe that market data fees are too high, and that their excessive levels are made possible by the opaque governance structures of the three joint industry plans for market data and a lack of transparency in the fee-setting process. SIA advocates cost-based market data fees, and a separation of regulatory costs from market data costs to ensure adequate funding of the collection and dissemination of market data and also adequate funding of regulation. In addition, we believe that these changes should be supported by transparent joint industry plan governance and fee-setting processes, and streamlined contractual arrangements between firms and the three networks that disseminate consolidated market information.
Conclusion
America's securities markets remain the envy of the world. SIA stands ready, willing, and eager to work with Congress, the SEC, the SROs, and all other interested parties to ensure that we continue to offer investors and companies the most transparent, liquid, and dynamic markets available with unparalleled levels of investor protection.