SEC Market Structure Discussion

Securities and Exchange Commission

Market Structure Discussion

Monday, June 22, 2020

Discussion

In his opening remarks, Makan Delrahim, Assistant Attorney General, Antitrust Division, U.S. Department of Justice, emphasized the connection between the Antitrust Division and the Securities and Exchange Commission (SEC) and the need for “small government.” He praised SEC Chairman Jay Clayton for his leadership of the SEC, specifically referencing efforts to modernize regulation and oversight as well as increase transparency. He continually highlighted the role of competition in promoting healthy markets and increasing consumer benefits. Delrahim stated that the respective roles of the SEC and the Antitrust Division in encouraging principles of competition are increasingly important in an ever-changing financial market system. Delrahim continued that this responsibility often takes the form of modernizing regulations, noting and praising the SEC’s Market Data Proposal for lowering the barriers to market entry by enhancing the granularity, reducing the latency, and improving the dissemination of market data. He also referenced the Antitrust Division’s comments on the SEC’s Proxy Rule Proposal, outlining the position that the proposed measures will update regulations to better fit the modern landscape and lead to healthier competition. Delrahim concluded with the announcement of a Memorandum of Understanding between the SEC and the Antitrust Division that establishes a regular means of communication by providing for periodic meetings among the two agencies’ officials, thereby allowing for enhanced sharing of information, insights, and experiences.

Clayton began the discussion with Brett Redfearn, Director, Division of Trading and Markets, by outlining the three main areas of focus for the SEC as it relates to market structure: 1) improving the market for thinly traded securities; 2) combating retail fraud; and 3) addressing concerns about the quality and cost of market data. He echoed Delrahim’s statements on the importance of cooperation with other regulators as well as the power of choice and competition in the securities markets. Clayton continued that in reviewing equity market structure, he is always guided by the belief that access to material information can empower investors and energize the competitive forces that benefit market broadly. He highlighted the progress in terms of improving equity market structure efficiency and function over the past two decades before acknowledging the recent court case vacating the SEC’s transaction fee pilot, noting his belief that the SEC will move forward with efforts to modernize the National Market System (NMS) while following such guidance. Clayton said that in his view, the decision emphasized the need to have real data from exchanges, ATSs, and other market participants to facilitate oversight and analysis of new and existing rules.

Clayton then elaborated on the three specific initiatives identified at the various 2018 SEC roundtables on equity market structure. Beginning with improving the market for thinly traded-securities, Clayton noted that at this roundtable, many participants were critical of the one-sized-fits-all approach of Regulation NMS as it relates to all exchange-listed stocks. In response to this feedback, the SEC published its Statement on Market Structure Innovation for Thinly Traded Securities in October 2019, inviting market participants to submit proposals designed to improve the secondary market for thinly traded securities including requests to suspend or terminate unlisted trading privileges, known as UTP. Redfearn then described the specifics of the Commission’s work on this front, outlining his concern as to whether the current market structure that works relatively well for very active stocks is optimal for thinly traded securities. He specifically referenced certain proposals worth considering such as providing incentives to market makers to assume heightened obligations with regard to thinly traded securities, implementing periodic intraday auctions as a means to concentrate liquidity, and introducing non-automated markets to facilitate trade negotiation and incentivize market maker participation. Redfearn concluded the discussion by thanking market participants for the comments already submitted and requested that going forward, proposals should fully lay out the elements of the proposed as well as the rationale for whatever relief is requested from current rules.

Clayton then turned to the SEC’s efforts in combating retail fraud and protecting Main Street investors. He stated that the 2018 Roundtable on Combating Retail Fraud focused on investor’s lack of information about companies with securities that are not listed on a national securities exchange, also known as OTC securities. Specifically, Clayton noted market participant concern regarding Rule 15c2-11, a provision that sets out requirements for broker-dealers to meet before they can publish quotations in an OTC security, and the need for it to be modernized. He continued that the proposed amendments to Rule 15c2-11 put forth by the SEC last September are intended to increase the availability of issuer information and modernize the rules governing quotations for OTC securities. Redfearn added that the proposed is designed to modernize the Rule by leveraging technological advances to minimize the cost of compliance and reduce regulatory burdens on broker-dealers quoting OTC securities that may be less susceptible to fraud and manipulation. He concluded this proposal is primarily concerned with enhancing transparency and investor protection while at the same time preserving the efficient access of investors to valuable investment opportunities.

In discussing the third roundtable initiative relating to market data and access, Clayton said that many roundtable participants expressed a strong belief that NMS market data was no longer adequate to meet the needs of many investors, both retail and institutional. Given these fundamental concerns, Clayton summarized the SEC’s three main actions in this space that addressed: 1) the process for review of NMS market data fee changes; 2) governance of the NMS market data plans; and 3) infrastructure for NMS market data. Redfearn then detailed the specifics of each respective market data proposal beginning with the proposal to rescind the effective-on-filing procedure for NMS plan fee changes before turning to the Final Order addressing the governance structure of the three separate NMS plans for equity market data via the establishment if a new single plan as well as the proposal to modernize the infrastructure for collecting, consolidating, and disseminating NMS market data.

Clayton concluded the event with a conversation examining the SEC’s responsibility to ensure that exchange fees for market data and connectivity comply with the Exchange Act. He summarized the SEC’s 2018 finding that after consolidating two exchange’s depth-of-book fee filings in response to challenges by market participants, the two exchanges had failed to demonstrate that competition appropriately constrained the exchanges’ pricing of their fees and the recent decision of the D.C. Circuit to vacate this order. Clayton continued that the Court’s decision focused narrowly on a procedural issue and did not address a key substantive issue, specifically, the Commission’s finding that two exchanges had failed to meet Exchange Act standards. In terms of a path forward, Clayton stated that the Commission will continue to pursue their regulatory responsibility to analyze concerns about the fairness and reasonableness of exchange fees for proprietary data and that he expects the Commission to be open to any reasonable framework for demonstrating that competitive forces restrict data fees. Redfearn concluded that Division of Trading and Markets staff is considering a variety of approaches for assessing the level and allocation of SRO fees in accordance with Clayton’s direction that staff report back to the Commission on potential approaches that could be adopted to fulfill its statutory responsibilities for exchange fees.

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