OPINION: Equities Market Structure in Focus


Equities market reform is moving ahead at a decent clip now that regulators and self-regulatory organizations are floating similar topics.

Nasdaq recently released a white paper, entitled Total Markets: A Blueprint for a Better Tomorrow, that recommends five market-structure reforms that, if enacted, could improve the markets for retail investors, such as eliminating the unlisted trading privileges for small stocks, modernize the quoting system, re-define what constitutes a “professional investor,” and reform the Securities Information Processors.

The white paper comes approximately a month after Securities and Exchange Commission Chairman Jay Clayton and Brett Redfearn, director of the Division of Trading and Markets at the SEC, gave their tag-team speech Equity Market Structure 2019: Looking Back & Moving Forward in which they floated several areas in which the Commission would like to investigate.

The Commission’s list included thinly traded securities, combating retail fraud, update SIP content and governance, adjusting round lot sizes, as well as rethinking the order-protection rule.

There is no causal link between the timing of the white paper’s release and the SEC speech, Phil Mackintosh, chief economist at Nasdaq, told Markets Media.

Both are the results of the lively industry roundtables the Division of Trading and Markets has hosted since the cessation of the Equities Market Structure Advisory Committee in 2017.

Everyone is in the same ballpark, but there are still several games to play.

For example, the Commission and Nasdaq suggest reforming the SIPs, but their recommendations go in several different directions. Nasdaq has floated consolidating the SIPs into a single SIP, eliminating extraneous bond and index data, and establishing a distributed SIP. Meanwhile, the Commission has suggested improving the SIPs’ performance and adding depth-of-book data.

How long will it take the Commission and the industry to reach consensus on how to move forward? That is anyone’s guess.

It certainly should take some time since, for all intents and purposes, all of the proposed market structure changes equate to a piecemeal Regulation NMS 2.0. First, start with the low hanging fruit, such as eliminating UTPs for small-cap stocks before beginning to reform the SIPs.

The drawback of this approach is its length. It is going to take a long time, much longer than it took the Commission and Wall Street to develop and rollout Reg NMS.

The Commission does not want to take a “big bang” approach to market reform. If the regulators turn too many knobs at once, there is no way to be sure which adjustment led to which result.

The significant downside to a phased approach is the length it will take to implement via proposed rules, the necessary comment periods, and lengthy pilot tests.

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