Hearing Summary Library



July 28 - Equity Market Structure Roundtable Hosted by Rep. Scott Garrett

Key Topics & Takeaways

Panel 1: Exchanges and Alternative Trading Venues:  Promoting a Level Playing Field and Enhancing Competition

  • SIFMA's Bentsen  recommended that: 1) access fees be "dramatically reduced or eliminated" because they and incent off-exchange trading; 2) market pricing information be distributed to all users at the same time; and 3) regulators and the industry work to improve disclosure regimes to help investors understand how their orders are routed and executed
  • KCG's Coleman stated that an access fee pilot program would be easier to implement than the tick size pilot, as clients would not be required to make systems changes and said it would be important to "simplify" and "narrow down" any changes to one particular area
  • NASDAQ's Greifeld said that the current access fee set by the government at 30 mils is "unlikely to be the right number today" and also suggested reforming Regulation ATS to "restore dark pools to their original purpose" of being a venue for block trading activity.
  • NYSE's Sprecher recommended eliminating and banning maker/taker programs, saying rebates add complexity and conflicts of interest.

Panel 2: Market Infrastructure:  Improving Resiliency and Eliminating Single Points of Failure

  • Nunes and Tomczyk stated that competition with market data aggregation will ensure that market data is received at the same time, give customers the best value, and eliminate single points of failure.
  • Tilley stated that a one-size-fits-all approach does not work for all exchanges, and that regulations must recognize differences in structure.

Panel 3: Market Making and Trading in the 21st Century 

  • Maloney said Regulation NMS has shown that any major change in markets needs to be assessed for potential impacts. Toes, Selway and Hickey agreed and expressed support for better analysis and clearer goals for pilot programs.
  • Nazarali said the idea that people are being disadvantaged by unequal access to information is nothing more than a perception, pointing out that 95 percent of executions are done by brokers with access to direct feeds.

Speakers 

Panel 1: Exchanges and Alternative Trading Venues:  Promoting a Level Playing Field and Enhancing Competition

  • Matt Andresen:  Co-Chief Executive Officer, Headlands Technologies LLC
  • The Honorable Kenneth E. Bentsen, Jr.:  President and Chief Executive Officer, Securities Industry and Financial Markets Association
  • Daniel B. Coleman:  Chief Executive Officer, KCG
  • Joseph Gawronski:  President and Chief Operating Officer, Rosenblatt Securities
  • Robert Greifeld:  Chief Executive Officer, NASDAQ OMX
  • Jeffrey C. Sprecher:  Chairman and Chief Executive Officer, Intercontinental Exchange

Panel 2: Market Infrastructure:  Improving Resiliency and Eliminating Single Points of Failure 

  • Bryan Durkin:  Chief Operating Officer, CME Group Inc.
  • Adam Nunes:  President, Hudson River Trading LLC
  • Joe Ratterman:  President and Chief Executive Officer, BATS Global Markets
  • Brett Redfearn:  Head of Market Structure Strategy Americas, J.P. Morgan Securities
  • Edward T. Tilley:  Chief Executive Officer, Chicago Board Options Exchange
  • Fred Tomczyk:  President and Chief Executive Officer, TD Ameritrade

Panel 3: Market Making and Trading in the 21st Century 

  • Bill Baxter:  Head of Global Program Trading and Market Structure, Fidelity Management and Research, on behalf of the Investment Company Institute
  • Doug Cifu:  Chief Executive Officer, Virtu Financial, LLC
  • Patrick Hickey:  Head of Market Structure, Optiver, on behalf of the FIA Principal Traders Group
  • Jamil Nazarali:  Head of Citadel Executions Services, Citadel Securities
  • Jamie Selway:  Managing Director and Head of Electronic Brokerage and Sales, ITG
  • Jim Toes:  President and Chief Executive Officer, Security Traders Association

Opening Statements

Rep. Scott Garrett (R-N.J.), Chairman of the House Financial Services Subcommittee on Capital Markets and Government Sponsored Enterprises, opened the event noting that his committee has been discussing the issue of equity market structure in depth over the past year. He said the roundtable would feature "some of the best minds in the market" and would allow for "deep dive" reviews of issues that have been raised with the current market structure.

Rep. Spencer Bachus (R-Ala.), said the equity markets today are the "best, most honest, and most ethical they have ever been" and added that if something is wrong in the current structure it would need to be fixed by changing the rules of the Securities and Exchange Commission (SEC). He stated that technology has caused most of the changes that have occurred in the markets and said that what is important is whether a stock purchase is a "good investment" and "not the speed in which you invest."

Rep. Bill Foster (D-Ill.) noted that his congressional district is the home to the CME's co-location facility and said while it is "easy to make the case" that technology has helped retail investors, the markets are "overly-fractured and lack transparency" in many respects. Foster said the term "dark pool" may "sound bad" but that "forcing trades into the open would create winners and losers." He expressed concern about incentives for sending trades to certain platforms that pay rebates and said that one-second timestamps on trades "are an embarrassment" because trading happens much faster than this interval. He concluded that alternative trading systems' (ATS) disclosures should be harmonized and provide information about their trading activity, as "market forces and transparency are often the best disinfectant."

Rep. Carolyn Maloney (D-N.Y.), Ranking Member of the Capital Markets Subcommittee, said that equity market structure is a non-partisan but complex issue and that she is looking for ideas to help make markets stronger and more transparent.

Rep. Steven Lynch (D-Mass.) said that "a lot of people" believe the markets are not as fair and  efficient as they once were and expressed concern that best execution is "not occurring" due to maker/taker programs and firms "chasing rebates."  Foster also worried that order flow is "being purchased and sold," thus allowing high frequency trading (HFT) firms to "get out in front and capitalize on dumb money."

Rep. Joyce Beatty (D-Ohio) said she is very interested in discussions surrounding equity market structure because there are 125,000 constituents in her district employed in financial services. She said she was "glad to hear the market is not rigged" but hoped to hear discussions on "front-running" in the markets.

Panel 1: Exchanges and Alternative Trading Venues:  Promoting a Level Playing Field and Enhancing Competition 

Matt Andresen, Co-Chief Executive Officer of Headlands Technologies LLC, did not provide an opening testimony.

Daniel B. Coleman, CEO of KCG, noted that his firm operates three different business lines: acting as a market maker; acting as an agency broker; and operating trading venues. He said that reforms should "set out to do no harm" and focus on: decreasing fragmentation; increasing transparency; and reducing costs. Coleman expressed concern with the SEC's tick-size pilot program, saying it would likely lead to increased execution costs, move liquidity off exchange, and add complexity. He suggested that changes be made to modernize the definition of market maker and that market data distribution networks be updated.

Robert Greifeld, CEO of NASDAQ OMX, said that all the panelists have the "common desire to serve investors" and suggested the following as "basic principles" to improve market structure: 1) reforming Regulation ATS to "restore dark pools to their original purpose" of being a venue for block trading activity; 2) reforming fees and maker/taker programs if they are distorting the market; 3) reviewing access fees to make the market "as frictionless as possible;" 4) allowing the "legal aspect of best execution" to "drive the market" as the current concept of best execution is "so vague that is it virtually meaningless;" and 5) giving all firms equal access to the markets.

Joseph Gawronski, President and Chief Operating Officer of Rosenblatt Securities, said that the complexity of the equity market structure started before Regulation NMS (National Market System) and said the "blueprint" of the market is "constantly changing." He stated that Regulation ATS has enabled the level of trading in dark pools to double, saying it accounts for about 37 percent of trading.  He suggested requiring greater transparency of off-exchange trading through a "beefed up Reg ATS," lowering access fees, and making trading venue regulation more uniform.   

Jeffrey C. Sprecher, Chairman and CEO of Intercontinental Exchange (ICE), said that the U.S. capital markets remain the "best in the world" but said there are a number of regulatory policies that need to be revisited. He suggested that regulations should: 1) enhance order competition by giving deference to transparent venues; 2) eliminate and ban maker/taker programs, as rebates add complexity and conflicts of interest; 3) lower the statutory maximum cap on exchange fees; 4) revamp market data systems; and 5) increase transparency of all trading centers to include real-time reporting and order route disclosures.

Kenneth E. Bentsen, Jr., President and CEO of SIFMA, said that while regulations and technology improvements have made the market "easier to access and more efficient," these same factors have also led to a "fragmented and complex" market structure. Bentsen noted that SIFMA recently convened "a broad-based task force of our diverse membership" to develop a series of market structure changes "that we believe will enhance transparency, provide for fair and timely access to market data, and address the complexity and fragmentation caused by rebates and order types." He highlighted three key areas of these recommendations.

First, Bentsen said that access fees should be "dramatically reduced or eliminated" because they make up a significant percentage of trading costs and incent off-exchange trading.  He suggested that the cap on access fees "should be lowered to no higher than 5 cents/100 shares" and stated that maker/taker programs have increased complexity and "led to proliferation of order types." He stated that reducing exchange fees would reduce this large number of order types.

Second, Bentsen continued, market pricing information should be distributed "to all users at the same time."  He suggested that, in the short term, the securities information processors (SIPs) should be improved to reduce their latency and provide the "fastest information available;" and that over time, the central SIP structure should be replaced with multiple processors that would distribute public market data and "compete on performance and cost" to better serve the marketplace.

Third, Bentsen said that regulators and the industry need to work to improve the disclosure regime to help investors understand how their orders are routed and executed.

Question and Answer

Access Fees

Bentsen said there is "convergence" of ideas around access fees. He said these fees have an economic effect and will determine if trades go to lit or un-lit venues. He added that the disclosure regime on the "institutional side of the market" can be improved.

Sprecher said that lowered access fees should be coupled with "giving deference" to trading on lit markets.

Greifeld said that the current access fee set by the government at 30 "mils" is "unlikely to be the right number today"

Andresen explained that, over the years, the markets made the choice to settle on "30 mil" access fees and that the SEC simply codified this decision. He said the exchanges would be free to lower this fee but chose not to for competitive reasons. He then cautioned about "knock on effects" of lowering access fees.

Maker/Taker Programs 

Sprecher said that if maker/taker programs and access fees are addressed there will be less dark pool activity.

Andresen noted that his previous firm, Island ECN, created maker/taker programs as a form of advertisement, but now that every order is electronically available, the reason maker/taker was created, "no longer exists." 

Sprecher explained that the New York Stock Exchange (NYSE), owned by ICE, has "dozens of order types, rebates, and incentives" that are "overly complex." He said that eliminating maker/taker programs would allow the NYSE to reduce their number of order types.

Rep. Bill Huizenga (R-Mich.) asked what should be done with maker/taker programs.

Andresen said that if both sides of the maker/taker incentive are "muted" the market will end up in a better place. He stressed, however, that any possible effects on retail customers should be considered if changes are to be made to these programs, or to access fees.

Maloney said there is consensus that stakeholders should be treated equally and asked if rebates create conflicts of interest.

Greifeld said that maker/taker incentives promote liquidity but if they are too large they can "create distortions."Accordingly,  Greifeld stated that he is open to revisiting or looking at access fees. Coleman agreed, stating that maker/taker creates conflicts, yet at times can be appropriate to create incentives. However, Coleman added that part of the problem is that maker/taker rebates now make up a large part of commissions.

Dark Pools 

Maloney said that one of the main goals of the Dodd-Frank Act was to create transparency, but worried that the movement of trading into dark pools has decreased market transparency. She asked if the lit markets can still perform their price discovery function.

Greifeld said everyone should agree that the average trade size in dark pools of 187 shares is not large enough to be considered a block.

Coleman said that there is general agreement that the markets are too complicated and fragmented. He further stated that it is less about dark pools generally, and more so about what is driving order flow away from the exchanges (e.g. access fees).

Sprecher said that minimum size or price improvement levels could be set by statute for dark pools to leave their benefits for large trades.

Bachus said that dark pools are "in some ways, just private transactions" and noted that there are times when disclosure sacrifices privacy.

Bentsen explained that unlit markets "are not un-regulated," noting that they are under the supervision of the SEC and the Financial Industry Regulatory Authority (FINRA) and are subject to various disclosure requirements. He highlighted that investors have not called for the elimination of unlit markets and cautioned lawmakers not to be "overly prescriptive" in their view on what block sizes may look like, citing the difficulty in the swaps market on such a definition.

Lynch stated that he thought there would be more resistance from the panel on proposed changes to market structure. He then asked how much trading activity would migrate to the lit markets if access fees and order sizes were "right sized."

Gawronski said that if these steps were taken, "maybe 10 percent" of dark pool trading would move back onto lit exchanges, thus leaving about 25 percent of all trading on dark pools.

Beatty noted that other jurisdictions including Canada, Australia, and Hong Kong have set minimum trade sizes for dark pools asked for the panelist's thoughts on such a requirement. 

Greifeld said that in these countries there was an initial decline in dark pool trading but that now block size transactions are "coming back" to dark pools.

Gawronski said that research has suggested that market conditions have improved since these measures were put in place.

Bentsen said that there is a lot the U.S. can learn from the rest of the world but that policymakers should be careful "not to be too prescriptive" as a minimum share threshold for block transactions may have a disruptive effect on the market.

Small-Cap Liquidity 

Lynch said that smaller companies listed on the exchanges are not seeing much trading activity and asked if there is anything that can be done to help these companies.

Sprecher agreed that "on the tails" of the market distribution, smaller companies are not getting much attention. He also said that there is "cynicism" among entrepreneurs and a perception that the market isn't fair. He concluded that "at a minimum" this perception can be addressed. 

Foster asked if tier-ing access fees for stocks that are more liquid vs. less liquid could be a middle ground, to which Greifeld said yes. Gawronski added that the solutions for increasing liquidity of small-cap companies lie outside market structure reforms and suggested that SEC fees could be removed for these companies. 

Reform Pilot Program 

Foster asked if lowering access fees can be realistically done with a pilot program before going market-wide.

Andresen said that a pilot could be put in place quicker than the tick-size program but said it should include more than just adjustments to access fees and address maker/taker programs as well. 

Rep. John Carney (D-Del.) noted legislation he worked on for a tick-size pilot program and asked how best to structure a pilot program to address the issues raised in this discussion.

Coleman said it is difficult to get evidence from the market to support reforms without a pilot program and said it would be important to "simplify" and "narrow down" any changes to one particular area. Coleman referenced the challenges with evaluating the tick size pilot program, since it has three separate variables. Greifield expressed his concern regarding the amount of time and cost it would take to implement the system changes. In response, Coleman stated however that an access fee pilot program would be easier to implement than the tick size pilot, as clients would not be required to make systems changes.

In response to a question regarding pilot programs generally, Coleman stated that they should be used where appropriate and kept simple. Greifeld urged caution on pilot programs, saying they have a tendency to become permanent and should be used in specific scenarios.  

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Panel 2: Market Infrastructure:  Improving Resiliency and Eliminating Single Points of Failure   

Before introducing the panelists, Garrett said technology has offered improvements but has also contributed to disruptions and distortions in the marketplace. He lamented that the public only notices the problems.

Fred Tomczyk, President and Chief Executive Officer of TD Ameritrade, stated his belief that market structure has never been better for retail investors, citing deceased costs and increased liquidity. Given this, he said technology problems seem to be more of a Wall Street problem than a Main Street problem.

Tomczyk said there can be no "quick fix" solution to improving market resiliency, and that best-practice reviews of the largest participants, coupled with market-developed solutions, would be the best way forward. He stressed that reform should be preceded by a clear understanding of what the problems are, but offered that despite its complexity the current structure "works well." He supported the SEC's data-driven approach and said he would like to improve market structure without disrupting markets.

Brett Redfearn, Head of Market Structure Strategy Americas at J.P. Morgan Securities, said much good work has been done to promote stability, including Regulation SCI, but that there will always be breaks in the market that regulators and participants must be prepared to react to.  He conceded that complexity can exacerbate instability, but said this is a somewhat inevitable result of competition. He argued that some complexity is necessary in the market and that there is no "one-size-fits-all" approach to follow.

Redfearn criticized the lack of investment and governance in the Securities Information Processor (SIP), pointing to the lack of transparency in how it operates and the need for more robust information. He questioned whether it still makes sense for SIPs to be operated solely by self-regulatory organizations (SROs).

Adam Nunes, President of Hudson River Trading LLC, stated that automation in markets creates great savings, but also creates the danger of automation failures, and Regulation NMS has led to an overly-complex market structure.

Nunes offered recommendations for reform: 1) Requiring exchanges to qualify for protected quotes based on their market share; 2) eliminated lock and cross-market provisions of Regulation NMS; and 3) ending the threat of a single point of failure represented by SIPs being delivered by a central consolidator. Nunes closed by saying he supports a holistic review of market structure by the SEC.

Bryan Durkin, Chief Operating Officer of CME Group Inc., said the future and equities markets are closely related so it is important to understand how futures markets work. The futures market is very centralized, he explained, and operates with a very limited set of order types. He suggested that all market operators adopt risk mitigation controls such as stop-logic functionality and messaging volume controls.

Durkin said the unintended consequences of regulations should be considered, and stated that he does not support new regulations for high-frequency trading (HFT) in futures markets. Despite being the focus of negativity, he said HFT improves markets by increasing liquidity.

Edward T. Tilley, Chief Executive Officer of the Chicago Board Options Exchange, said that while options exchanges are regulated like equity exchanges, their operations are much more similar to futures marets. He hoped regulators would focus on the benefits of the options markets, and that new regulations will work to promote transparency, limit regulatory arbitrage and level the playing field for investors.

In order to limit system disruptions, Tilley recommended regular system reviews, strong cybersecurity measures, and eliminating inefficiencies in exchanges' systems.

Joe Ratterman, President and Chief Executive Officer of BATS Global Markets, said technological advancements have made trade execution faster than ever, with tighter spreads and lower transaction costs. He also credit advancements with cutting the number of erroneous executions by 85% from the five-year average. Nevertheless, he expressed his support of an SEC review of market structure that would be focused on improved stability.

Ratterman offered his own recommendations for SIPs, saying they should be deregulated to promote competition, bifurcated into two channels to improve infrastructure diversity, and made as fast as possible.

Question and Answer 

SIPs and Data Feeds

Garrett noted that SIPs were created under a totally different market structure, and asked whether anything can be done to provide data in a different way entirely. Redfearn said he supports SIFMA's recommendation for an alternate market data aggregators (i.e. competing SIPs), but also cautioned that "geographic competition" means it will still be impossible to deliver data to all participants at the same time. Similarly, Tomczyk stated that allowing competition for the provision of data makes sense. He cautioned against maintaining a structure that could suffer a single point of failure.

Maloney said all users should have access to the same data at the same time, and asked how such technology can be built. Ratterman answered that significant investments have been made to improve speed, and that competition will drive further advances. He suggested having systems that could provide different types of data to suit investors' differing needs. Redfearn provided several comments, particularly those reflected in SIFMA's equity market structure recommendations, including the need for improvements to the SIPs connectivity and data aggregation, as well as that market centers must use consistent sources of data to update their order books. Further, in line with SIFMA's recommendations and the earlier comments raised, Nunes and Tomczyk stated that competition with market data aggregation will ensure that market data is received at the same time, give customers the best value, and eliminate single points of failure.

Carney asked whether competition would increase complexity. Tomczyk again stressed that competition fuels significant advancements and said he does not buy the argument that it would lead to greater complexity or market vulnerability.  Ratterman said the prices paid for information are lower than ever because of competition, and that the resiliency of an interconnected market depends on the ability to overcome single-node failures that allows markets to keep trading. He argued that every system will fail at some point, but at least competition would mean that other data feeds could fill the void. Nunes stated that the current regulatory structure, not competition, is the driver of complexity.

Other Areas for Reform 

Bachus asked what the main technology areas are that need to be addressed.  Durkin said protocols at the exchange-level in risk management to prevent market disruptions should be implemented, such as stop logic and velocity logic or best practices. Tilley noted that much time is spent resolving problems after they arise, and suggested that participants should know what to expect from exchanges beforehand.

HFT 

Rep. Bill Huizenga (R-Mich.) asked if efforts to "level the playing field" by slowing down high-frequency traders would help either competition or stability. Nunes replied that changes in speed by microseconds do not affect stability, and that the only difference to arise in markets from HFT is that humans are no longer middlemen, resulting in lower costs but higher risk. Redfearn said there is a definite policy question to be answered at some point over the technology gap, including the concern on the need to continually allocate funds for technological upgrades Ratterman countered that speed in itself is not creating complexity, adding that it results in better prices and less risk with greater liquidity. He claimed that technology will not stop developing, but that HFT firms are approaching the point of diminishing returns on speed, so the market will "flush itself out" of any problems.

Risks of Overregulation 

Rep. Robert Hurt (R-Va.) asked what the biggest risks are of overregulation. Tomczyk said regulation of technology is a "never-ending race" because technology does not lend itself to prescriptive regulation. Tilley answered that a one-size-fits-all approach does not work for all exchanges, and that regulations must recognize differences in structure.

SEC Commissioner Piwowar 

SEC Commissioner Michael Piwowar joined the panel and was asked by Garrett about the Market Information Data Analytics System (MIDAS). Piwowar said MIDAS would let the SEC monitor market data in real time to track possibly-nefarious activity or to detect if an algorithm is behaving strangely. He also spoke briefly on the Consolidated Audit Trail (CAT), saying it is "a long slog" to get exchanges to agree on the best approach moving forward.

Lynch asked what measures are being taken to ensure that markets are not disrupted by cyber terrorism or crime. Piwowar responded that there cannot be a prescriptive solution, but that the SEC is working with exchanges. He argued that exchanges have the most self-interest in maintaining cybersecurity practices. Ratterson said BATS has a command center fully dedicated to cybersecurity, and assumed the same of other exchanges. He stated that exchanges work with law enforcement and communicate about threats, and want to work with other exchanges. Tomczyk said the industry is trying to share best practices, and is working with SIFMA on cybersecurity issues.

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Panel 3: Market Making and Trading in the 21st Century 

Bill Baxter, Head of Global Program Trading and Market Structure at Fidelity Management and Research, provided that technology has significantly improved speed and liquidity and benefited investors. However, he said there is still work to be done in the areas of market stability, transparency and complexity. He expressed his support of a holistic market structure review.

Patrick Hickey, Head of Market Structure for Optiver, advocated for open access to markets, greater transparency, and a data-driven regulatory policy. He stressed that automated trading has improved equity markets by lowering costs and improving both liquidity and price discovery.

Doug Cifu, Chief Executive Officer of Virtu Financial, LLC, said his company is a "leading liquidity provider" that plays an important role in maintaining and improving the health of global capital markets in a way that benefits all market participants. While he said U.S. markets are the most efficient, liquid and dynamic in the world, he conceded that they are also overly-fragmented and overly-engineered.

Cifu offered four recommendations for a new market structure: 1) end the one-size-fits-all approach to market structure; 2) conduct a broad review of Regulation NMS;  3) create an NMS market maker characterization for firms; and 4) eliminate the consolidated quotation system.

Jamie Selway, Managing Director and Head of Electronic Brokerage and Sales at ITG, called himself a "big fan" of disclosure, science and data, and the modernization of SEC rules. He noted that trading costs have gone down 70 percent in the last 20 years and attributed this to automated trading.

Jim Toes, President and Chief Executive Officer of the Security Traders Association, said the intermediation role has evolved and that market makers and block traders help the market by enhancing liquidity for small and mid-cap companies. He said he believes in the benefits of enhanced liquidity, and that is existence should be incentivized through a reduction of costs in the trade of illiquid securities.

Jamil Nazarali, Head of Citadel Executions Services at Citadel Securities, agreed with Toes that intermediaries play an important role in bridging buyers and sellers. He added that technology has led to the development of new, better and more efficient markets.

Nazarali gave some of his recommendations to further improve markets: 1) have brokers file consistent reports of execution quality; 2) require dark pools to offer fair access and prices to all market participants; 3) lower the maximum access fee; and 4) reduce the minimum tick size for the most liquid securities.

Question and Answer 

HFT

Garrett asked if there is a clear definition of HFT, and whether is data to empirically show that it improves liquidity. Nazarali commented that most refer to anything automated trading to holding positions for short periods of time. He added that as automated trading has grown, execution costs have fallen for retail investors. Toes said HFT is proprietary in nature and uses low-latency models, and stated that there is "no debate" within the industry that HFT helps liquidity. Selway stated that a full, better definition is still needed, and claimed that HFT is "part of the picture" that has contributed to greater liquidity and lower execution costs, though it is hard to attribute improvements solely to HFT. On defining HFT, Hickey stated that the practice is more of a tool, not a strategy. Baxter characterized it as a business model and not a strategy.

Lynch claimed that most HFT firms deal in very liquid equities, rather than small companies, and argued that it is not credible to say they serve a market making purpose. Nazarali countered that his company in "unequivocally" a market maker because it deals in over 25,000 equities. Hickey said when HFT firms deal in high-cap stocks, it shows that the one-size-fits-all model does not work for everyone.

Regulatory Reform 

Maloney said her big takeaway on Regulation NMS is that any major change in markets needs to be assessed for potential impacts. She then asked what changes to current regulation the panelists would recommend. Toes, Selway and Hickey all supported better analysis and clearer goals for pilot programs. Selway further stated three additional areas for review, including the cap on access fees, ban on locked/crossed markets, and protected quotes. Hickey stated that putting too many variables in a single pilot is ineffective. Baxter and Cifu spoke against the one-size-fits-all marketplace, saying it does not work well for small-cap companies. Baxter suggested a system of tiered regulation and market maker obligations.

Nazarali added that the most important thing is to track execution costs and quality. He further stated that he is wary of market maker obligations, particularly in the context of the NYSE specialist system.

Asked about fragmentation in the marketplace, Toes said that while there are definite benefits to competition, there can be too much. He argued that if there is no connectivity between trading venues, competition does not serve the interests of investors. Baxter said not all complexity is negative but conceded that there is a lack of transparency in the marketplace. He spoke in favor of greater regulatory transparency for dark pools. Selway provided that over the past several years, the focus has been technology and the speed of trading. He stated that be believes that a good place for innovation will be with liquidity in small cap stocks. Separately, Selway provided that issues of fairness revolve around disclosure, and customers must be better information to trust markets more.

Data Feeds 

Hurt stated his belief that markets are not rigged and agreed that competition benefits investors, but expressed concern about the differences in latency between direct feeds and public feeds. Cifu said Virtu uses direct feeds to get a better understanding of markets, and questioned whether SIPs have outlasted their usefulness, suggesting they be eliminated or privatized. Nazarali said the idea that people are being disadvantaged is nothing more than a perception, pointing out that 95 percent of executions are done by brokers with access to direct feeds. "The perception of unfairness," he said, "does not match the reality." For instance, he noted that retail investors are the de facto beneficiaries when their orders are accordingly executed.

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