SEC Extends Market Structure Committee


What’s old is new again as the Equity Market Structure Advisory Committee has made several recommendations on several initiatives previously put forth while its term, set to expire this year, was renewed for another year.

The U.S. Securities and Exchange Commission formally and publicly extended EMSAC last week, adding almost another year – August 2017 – to give the new Commission time to decide if it wants to continue the group. At a meeting two weeks ago, EMSAC heard updates from two of the four subcommittees on policy. According to Andrew Upward, Head of Market Structure at Weeden & Co, the subcommittees didn’t change its positions on the preliminary recommendations it heard in July on the issues.

Subsequently, the SEC also voted on some of the EMSAC’s recommendations.

First, the Market Quality Subcommittee put forth tweaks to the Limit Up/Limit Down regime to make it work more like the futures market, that is to stay in limit state for 4 minutes and then revise limits down if state remains, rather than using outright halts. The subcommittee said it wants to align LU/LD to clearly erroneous rules. It also advocated to widen market-wide circuit breakers at + or – 10% using futures markets as benchmark. Lastly, the subcommittee said it wanted to see exchanges take steps to consistently open as close to 9:30am as possible.


Andrew Upward, Weeden & Co.

The three-pronged recommendation to modify the Limit Up-Limit Down plan was approved by the SEC by a 15-1 vote. The three prongs are as follows:

1)    Do not halt and re-open a stock that has triggered an LU/LD band and been in a limit state for 15 seconds. Instead, give the stock four minutes in which to leave the limit state, and during that time prevent the stock from trading below its limit-down price (or above its limit-up price). Once the four minutes is up, reset the LU/LD bands with the previously triggered band as the new reference price and allow the stock to trade freely inside the new bands.

2)    Harmonize the Clearly Erroneous Execution thresholds with the LU/LD bands such that no trades printing inside the bands can be declared Clearly Erroneous (trades printing outside the bands, while rare, would be eligible to be deemed Clearly Erroneous by the exchanges).

3)    Allow stocks that trigger an LU/LD band to trade back up (or down) to its reference price without triggering the opposite-side band on the way back.

The recommendation to widen the first Market-Wide Circuit Breaker threshold to 10% from the current 7% threshold was approved by all commissioners. Also, the recommendation that the SEC and the exchanges adopt policies and procedures to ensure that all stocks open for trading as close to 9:30 a.m. EST as possible was also passed unanimously.

Also meeting was the Customer Issues Subcommittee – which had recommended tweaks to Rule 605 and 606 order routing disclosures. This group also examined the institutional order routing proposal, which the SEC issued in August and suggested that the SEC should not require orders to be identified as aggressive, passive or neutral.

The group also advocated that the SEC should make clear what conditional orders do not meet the standard for actionable IOIs, and lastly that the SEC should study Payment for Order Flow (PFOF) and soft dollar arrangements.

“A review of PFOF is not surprising given the potential for conflicts of interest,” Upward said. “The soft dollar review recommendation is noteworthy as it is the first official regulatory nod to the coming impact of MiFID II regulations in Europe.”

Upon review, the SEC approved unanimously the multi-pronged recommendations to modify Rules 605 and 606 of Reg NMS.

The prongs are as follows:

1)   Abandon the $200,000 threshold that would separate retail orders (<$200k) from institutional orders (>$200k) per the SEC’s recent “Institutional 606” proposals, in favor of a held vs. not-held distinction (held orders are retail orders, not-held orders are institutional).

2)   Require exchanges and ATSs that route orders to other market centers to publish quarterly 606 reports like other broker-dealers do.

3)   Have the SEC’s Division of Economic Research and Analysis (DERA) study the impact on the quality of the 605 and 606 data of using the exchanges’ proprietary feeds as the basis for those metrics instead of the SIP feeds.

It also looked at a bevy of recommendations specific to retail orders:

  1. use the SEC’s MIDAS website as a repository for all 605 and 606 reports and extend the MIDAS visualization tool to include those reports
  2. require all broker-dealers to publish 605 reports (not just broker-dealers that are also market centers)
  3. modernize Rule 605 by including odd lots, segregating IOC orders, and introducing new sub-second timeframes, among other things
  4. modernize Rule 606 by segregating orders by whether or not the stock is in the S&P 500 instead of by listing market, including OTC Equities, segregating out auction orders and stop orders, and segregating limit order by whether they’re marketable or non-marketable, among other things

Lastly, EMSAC made recommendations specific to institutional orders:

  1. eliminate the passive, neutral and aggressive algo categories proposed in the SEC’s Institutional 606 proposals
  2. clarify that actionable IOIs do not include conditional orders, and that only IOIs that are automated and eligible for immediate execution will count as actionable IOIs
  3. ensure that broker-dealers that use or “white label” another broker’s electronic execution tools have the information needed to make the disclosures required by the SEC’s Institutional 606 proposals
  4. exclude Directed Orders from the disclosures required under the SEC’s Institutional 606 proposals

“It’s now up to the SEC staff to advise the Commissioners on how to act on these recommendations. Given that SEC Chair White and SEC Trading & Markets Director Luparello are stepping down in January, we wouldn’t be surprised if the staff waits for direction from the new Chair and T&M Director before rolling up its sleeves,” Upward said. “The staff is already working on proposals related to the recommendations from the other two subcommittees: the Reg NMS subcommittee’s recommendation to launch an access fee pilot, and the trading venues regulation subcommittee’s recommendations to modify the NMS plan governance structure and to link rule implementation dates to the date of publication of technical specs or FAQs. We don’t know whether the staff will get those proposals to the Commissioners before the new leadership takes over.”

Looking ahead, Upward added that the Reg NMS subcommittee will now turn its focus to Rule 611 of Reg NMS – better known as the Order Protection Rule – and the trading venues regulation subcommittee is looking at SRO liability rules, regulatory centralization and consolidated market data.




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