EMSAC Comes of Age


WITH A HALF-DOZEN meetings under its belt, it’s fair to say the 20-month-old Equity Market Structure Advisory Committee has moved beyond the brand-new stage and is doing what it was established to do — act as a consigliere to the U.S. Securities and Exchange Commission on all things pertaining to equity market structure.

Introduced by the SEC in January 2015, the EMSAC has already made a proposal on a framework for an access-fee pilot, and another proposal on changes to the governance of the National Market System plan. The committee has considered a range of issues, such as the operation of Regulation NMS, the impact of access fees and rebates widely used by stock exchanges, the regulatory structure of trading venues, and the impact of various market structure issues on customers.

“I think a lot of people were skeptical that EMSAC would be effective,” said Jamie Selway, head of electronic brokerage at ITG.

“If you look at what subcommittees have suggested — the concise, discrete proposals on access fees and NMS governance — that’s already more than some people expected. It’s clear the EMSAC has gotten its sea legs and has been more productive than many thought it would be.”

The committee is constructed as a formal mechanism for the SEC to receive advice and recommendations specifically related to equity market structure issues. The 17-person group is comprised of market structure experts from the equities space, plus a sprinkling of academics, one regulator (Finra) and a proxy for the end-user investor (AARP).

The formation of the EMSAC addressed a core, longstanding criticism of the SEC: that it’s mostly staffed by lawyers with little or no experience in the trading trenches, and therefore the regulator’s policies can’t help but be at least a little out of touch and a half-step behind the market.

“The idea of getting some experts around the table and getting their advice on policy making is novel, at least in terms of market structure,” said Selway, noting that the SEC has taken this approach before with issues such as modernization of the bureau, small-business concerns, and investor advocacy.

“It’s amazing to hear some of the exchanges are hesitant to allow market participants a seat at the table around Reg NMS plans in terms of how they’re governed, yet the SEC has created a mechanism to get the advice of market experts.”


David Shillman, SECIn October 2015, EMSAC created four subcommittees: Regulation NMS, Trading Venues Regulation, Market Quality, and Customer Issues. In July 2016, the Committee voted on recommendations from two of the subcommittees, according to David Shillman, associate director of the SEC’s Division of Trading and Markets.

“First, the Regulation NMS subcommittee recommended a framework for an access fee pilot that would measure the impact of reduced access fees on current equity market structure,” Shillman told Markets Media.

“Second, the Trading Venues Regulation subcommittee recommended changes to the current NMS Plan governance and changes in the self-regulatory organization’s proposed rule process when technology changes are also required.”

As far as next steps, Shillman said it is expected that the SEC may consider an access fee pilot later this year, and separately, the SEC is evaluating the trading venues recommendations and exploring possible rulemakings to enhance the NMS Plan governance process.

“In August 2016, the Market Quality and Customer Issues subcommittees presented their preliminary recommendations to the full Committee,” Shillman said.

“The subcommittees’ recommendations focused on areas regarding potential improvements to mechanisms that moderate excessive market volatility and on enhanced order-handling disclosures to customers.”

The access fee pilot is a byproduct of the ongoing contention around ‘maker-taker’, the exchange pricing model in which customers are charged an access fee to remove liquidity, and are paid a rebate to provide liquidity.

On June 16, the EMSAC’s Regulation NMS Subcommittee recommended that the SEC propose a pilot program to adjust the access fee cap under Rule 610, which addresses access to markets. The intent of the proposed pilot is to better understand the effect of access fees on liquidity provision, liquidity taking and order routing with the ultimate goal of improving market quality.

The EMSAC’s recommendation is for a two-year pilot that covers four ‘buckets’ of symbols; one would be a control bucket and the other three would have their own unique access fee. The objectives are to measure the impact of lower access fees on liquidity provisioning, via assessing bid/ask spreads, market depth, order-routing behaviors, ratio of hidden liquidity vs. displayed liquidity on the exchanges, and quoting behavior. On the other side, the impact on liquidity taking would be analyzed, via the ratio of on vs. off exchange trading, order routing, price impact, slippage/ realized spread, and trade volume.

As with any large group whose members represent a diverse crosssection of market participants with competing interests, EMSAC discussions aren’t always harmonious, and not everyone gets what they want. But the group has won praise for its collaborative approach, and for hearing all sides of the issue.

“The EMSAC voted to recommend an access fee pilot,” said EMSAC member Jamil Nazarali, head of execution services at electronic market maker Citadel Securities. “While we do not support this proposal, we believe that some of our concerns have been taken into account, resulting in improvements to the pilot.”

With regard to NMS governance, the EMSAC’s Trading Venues Regulation Subcommittee in June stated that the current regulatory structure for trading venues works well and is generally fair and effective, so an overhaul of the current structure is not necessary.

But, tweaks are indicated. Specifically, the EMSAC recommended that the SEC make the role of NMS Plan Advisory Committees more significant, formalized, and uniform, and to promote more efficient technical implementation of rule changes.


The market events of August 24, 2015 have been a point of focus for EMSAC. On that summer Monday morning, a sharp decline in Chinese markets spilled over to the U.S., with attendant spikes in trading volume and volatility. There was no major disruption, failure, or outage, but there were pricing issues with some exchange-traded funds, and the market opening was a little late and more than a little disorderly.

The limit up / limit down mechanism, which is designed to tamp down extreme volatility by preventing trades in NMS stocks from occurring outside specified price bands, is under EMSAC review.

Currently, “a stock has to go through a reopening auction if its trading is halted, which is very inefficient and disruptive to the market,” Nazarali told Markets Media. “The Market Quality Subcommittee is proposing the limit up / limit down rules be modified to look more like the futures market, so that trading in a stock pauses, rather than going through the current reopening process.”

“Finally, we’ve suggested making the market-wide circuit breakers based on futures, and potentially widening them,” Nazarali added. “All of these measures are meant to ensure that if an August 24 event ever happened again, it would be much less disruptive to the markets.”

On August 2, 2016, the Customer Issues Subcommittee presented initial recommendations to the full Manisha Kimmel, Thomson ReutersEMSAC. “Recommendation #1 dealt with benchmarking and monitoring investor confidence in U.S. equity market structure with a specific focus on testing the usability and effectiveness of disclosures,” said EMSAC member Manisha Kimmel, chief regulatory officer for wealth management at Thomson Reuters.

“Recommendation #2 dealt with enhancements to Rule 605 and 606 to promote accessibility, standardization and comprehensiveness of the disclosures from a retail perspective,” Kimmel told Markets Media. “Specific recommendations included centralizing the availability of Rule 605 and 606 reports on the SEC website, harmonizing the scope of Rule 605 and 606 reporters to include retail broker-dealers, exchanges and ATSs as well as introducing new fields and more granular data elements.”

The most important business for the Customer Issues Subcommittee is to finalize the two recommendations, Kimmel said.

“Additionally, we will focus on making recommendations as it relates to the SEC’s recent orderhandling proposal which was released in mid-July. Topics for discussion include the definition of retail versus institutional as well as execution quality disclosures from an institutional perspective,” she said. “We anticipate seeking industry feedback as we explore these topics.”

Effective financial regulation needs to address the issue at hand without undue cost to the regulated entities. Given that EMSAC membership is heavy on practitioners, the committee brings a valuable perspective to this aspect of regulation.

“My key concerns are centered on ensuring that we are recommending meaningful changes that reflect current market structure without imposing significant operational or compliance burdens on the wealth management industry,” Kimmel said. “Retail execution quality has improved over the last several years. By modernizing existing disclosures, we can demonstrate that success with hard data. However, we need to ensure that proposed disclosures like those outlined in the SEC’s order handling proposal avoid unnecessary complexity and reflect the reality of how the wealth management industry manages order routing and execution quality.”

One criticism of the EMSAC has been that the group has no direct representation from retail market participants. To address this gap, Nazarali of Citadel and Bats Global Markets Chairman Joe Ratterman formed the Retail Advisory Council, which includes some of the largest retail broker-dealers.

Jamil Nazarali, Citadel Securities“The purpose of this group is to engage the retail broker community on market structure issues and represent its views” on the EMSAC, Nazarali said. “For example, input from the retail brokerdealer community was invaluable when discussing the events of August 24 and the need to continue providing retail investors with the opportunity to use various order types such as stop and market orders.”

The EMSAC was meant to meet about four times per year; August 2 was its fourth get-together of 2016. As with many other organizations with business in Washington, D.C., there is expected to be a lull leading into the November 8 presidential election, that will continue into 2017 as the incoming administration settles in. “Let’s not get greedy here and expect too much out of the EMSAC folks,” ITG’s Selway told Markets Media on July 27.

“The two proposals we’ve seen are already pretty good progress, and maybe we get two or three more by year’s end. That’s good work out of the EMSAC, but then it really comes down to, what does the SEC staff do with them?”

Shillman didn’t comment on how the SEC will or will not act on the EMSAC’s recommendations, but he indicated the group is pulling its weight in the very important business of improving the safety and soundness, and level of investor confidence, in the stock market.

“Maintaining and enhancing the high quality of the U.S. equity markets is one of the Commission’s most important responsibilities,” Shillman said. “The Committee’s work is an important part of that and is of great assistance to the Commission as it continues its efforts to ensure that the equity markets optimally meet the needs of investors and public companies.”


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