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Equity Market Structure: An Update at OIC

This week, SIFMA’s Ellen Greene participated in the Washington Perspectives panel discussion at the 2022 Options Industry Conference in San Antonio.

In these prepared remarks for the Conference, Ellen touches on the resiliency of the markets through COVID-19 and the Meme Stock Event and, despite what some thought, the continued retail participation in the markets. She notes there while there are certainly areas of our capital markets in need of reform, any changes must be implemented with caution and care with an eye towards managing and improving the overall financial system.

Equity Market Structure: An Update

Two years ago, COVID caused the world to shut down and forced almost all financial services employees to work from home. The industry had tested remote sites but never on the magnitude of everyone working remotely at the same time.

Markets faced extreme volatility with large drops that for the first-time triggered market wide circuit breakers on four occasions in March 2020. The VIX peaked at 82 up 563% from the start of the year.  With multiple 1,000-point intraday price swings, the markets remained open and functioned well. Despite a few hiccups, the financial system and market infrastructure remained extremely resilient. And eventually, markets settled from the COVID-related turmoil.

Advance forward to the start of 2021. In the last week of January, members of WallStreetBets joined together to squeeze short sellers in a handful of stocks, including video game and consumer electronics retailer GameStop. Retail investors joined in on the trade, driving up the price of GameStop by over 1,000%.  This movement, known as the Meme Stock Event, moved the VIX sharply higher to levels in line with the full year 2020 average, a year that included months of elevated VIX levels during the height of the pandemic.

Despite the increased activity, markets again proved their resiliency. Even the SEC report analyzing the MemeStock event could not deny this fact.

Retail Engagement

Despite what some thought, the retail revolution of January 2021 did not slow down. In fact, much of the growth in listed options volumes in 2020/2021 was attributed to increased participation by retail. Earlier this year, we surveyed SIFMA’s equity and listed options trading committees and exchange representatives – the people tasked with executing customer trades– to gauge retail participation levels.

Half of the survey respondents estimated that in 2021, retail participation in listed options was 30-40%, an increase compared with 2020, when a similar number of respondents estimated participation to be in the high 20s to low 30s. Looking ahead to 2022, over 1/3 of respondents expect the level of retail participation to decline. While our focus here is on options, we note that over 58% of survey responders estimate that the level of retail participation in the equity markets in 2021 was 20-30% with almost 44% of responders agreeing this percentage will also decline in 2022.

So, what drove the increase in retail participation? Our survey respondents attributed this to the following:

  • $0 commissions,
  • technology and enhanced access to platforms,
  • education and the continuation of people working from home.

To keep retail investors engaged, survey respondents noted the importance of firms maintaining $0 commissions, providing a positive investing experience, and continued upward momentum in markets.

Regulatory Changes

SIFMA acknowledges that markets and technology have evolved since Reg NMS was implemented in 2006, and that a review is warranted. However, as indicated by SEC Commissioner Hester Peirce, opening one aspect of equity market structure – which has a lot of tentacles – could cause unintended consequences in other areas. Such unintended consequences must be carefully considered and analyzed.

Commissioner Peirce has publicly stated that the equity markets work well, and like SIFMA, has stated that the retail investor has never had it better in terms of cost and access. If changes to equity market structure increase investor costs, it could negatively impact retail participation. Commissioner Peirce indicated this would not be a good outcome since, and I quote, “everyone should have cheap, efficient access to markets.”

As we await specific equity market structure proposals from the Commission, I would note SIFMA’s concerns about the SEC’s pursuit of its unprecedented rulemaking agenda.  The sheer volume and velocity of SEC proposals, coupled with serially short comment periods which do not allow for comprehensive public comments, could compound our current challenges and result in adverse consequences for the real economy in terms of output, employment, investment, and prices.

There are certainly areas of our capital markets in need of reform, but any changes must be implemented with caution and care with an eye towards managing and improving the overall financial system.

Ellen Greene is Managing Director, Equity and Options Market Structure at SIFMA. In this capacity, she is the staff advisor for both the Equity Markets & Trading Committee and the Listed Options Trading Committee. Ellen also leads SIFMA’s advocacy work on the Consolidated Audit Trail through SIFMA’s CAT Task Force.

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