Market-Structure Proposals Parsed

Terry Flanagan

Proposed changes in market structure that have been advanced by two of the three biggest U.S. equity-exchange operators, such as reducing access fees and implementing a trade-at rule, represent a positive step in promoting competition and transparency, according to Jamie Benincasa, senior vice president, equities at trading-technology provider FlexTrade.

“Any movement by the (Self-Regulatory Organizations) to improve the current inefficiencies in market structure is absolutely encouraged,” Benincasa told Markets Media. “We don’t want to end up with another situation where the playing field is not level.”

Bats Global Markets has proposed implementing tiered market access fees, depending upon an individual security’s average daily volume, beginning at $0.0005 per share (five cents per 100 shares) for the most liquid U.S. securities.

The equity and options exchange operator has also proposed that Regulation NMS (National Market Structure) be revised so that, until an exchange or other currently protected market center attains more than 1% market share of consolidated average daily volume in any rolling three-month period, it should no longer be protected under the trade-through rule, and not share in, or otherwise receive any NMS plan market data revenue.

This addresses the concerns of many market participants regarding how the current structure may artificially subsidize competition or encourage complexity that does not address a market need.

Jamie Benincasa, FlexTrade

Jamie Benincasa, FlexTrade

“That’s a fair hurdle,” said Benincasa. “I shouldn’t have to maintain connections and pay fees to access markets that I might hit one or two times a day.”

The cost of accessing real-time market data from all marketplaces has increased along with the number of visible marketplaces. The Canadian Securities Administrators, for example, estimates that the single monthly professional subscriber cost of accessing level 1 and level 2 data from all marketplaces is approximately $110 and $275, respectively.

IntercontinentalExchange has proposed adoption of a trade-at rule that would require brokers to interact with the National Best Bid or Offer (NBBO) on lit markets before executing on dark trading centers, thereby providing an incentive for market-makers and investors will have to advertise their trading interest by entering displayed orders.

ICE is also proposing elimination of maker-taker pricing, which has become the accepted form of pricing used by exchanges. With myriad different make-take and take-make pricing models in existence today, ICE believes the potential conflicts and complexity that ensue from the maker-taker models outweigh any perceived benefits.

“From an overall perspective, adjustments to the maker-taker model that would lessen the opportunities for arbitrage by the high-frequency trading firms should be encouraged,” said Benincasa. “ICE is trying to do away with maker-taker. They want everything lit, they want everything exposed on the exchanges. We’re a little bit too far down the road to go back to a specialist, but encouraging orders to be shown on lit markets is a very positive movement.”

SROs and exchanges should band together and come up with a common set of objectives that would reduce the need for the SEC to come in and create a new set of rules, said Benincasa.

“Rules are costly. New regulations are costly. It’s a tax on the industry, therefore it’s a tax on trading,” he said. “If the exchanges can define what needs to be done and be allowed to self-regulate by implementing solutions more efficiently, I think we’d get a better result than something that’s going to come out of D.C.”

Bats has also proposed that alternative trading systems be required to provide their rules of operation to customers, and Rules 605 and 606 of Regulation NMS be amended to require additional disclosure of achieved execution quality on a broker-by-broker basis.

“While the highly efficient, fair and transparent U.S. equity market is widely viewed as the world’s most competitive market, a one-size-fits-all approach may no longer best meet the needs of end investors, issuers and the industry’s many participants,” Bats CEO Joe Ratterman said in a statement. “The market has long been defined by its continuous quest for improvement, and we believe a material reduction in access fees for the most liquid securities, coupled with an intelligently tiered approach for less liquid stocks, is an excellent place to begin.”

Featured image via Dollar Photo Club

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