Last Thursday, Mary Jo White, the Chair of the Securities and Exchange Commission (“SEC”), announced her plans to promote market stability and fairness, enhance market transparency and disclosures, and build more effective markets for smaller companies. Her initiatives will address market instability, high frequency trading, fragmentation, broker conflicts, and the quality of markets for smaller companies. She is also recommending the creation of a new Market Structure Advisory Committee to review specific suggestions and rule proposals
Preventing Market Instability
Commission staff are finalizing Regulation SCI, which will put in place stricter requirements for the technology used by exchanges, large alternative trading systems, clearing agencies, and securities information processors (“SIPs”). Efforts are also being made to address risks posed by market infrastructure systems that are “single points of failure” that can halt or severely disrupt trading when a problem occurs.
Addressing High-Frequency Trading
SEC staff are developing a recommendation for an anti-disruptive trading rule. Such a rule would apply to active proprietary traders in short time periods when liquidity is most vulnerable and the risk of price disruption caused by aggressive short-term trading strategies is highest. SEC staff have also been asked to prepare recommendations concerning: (1) a rule to clarify the status of unregistered active proprietary traders to subject them to SEC rules as dealers; (2) a rule eliminating an exception from Financial Industry Regulatory Authority (“FINRA”) membership requirements for dealers that trade in off-exchange venues; and (3) the improvement of firm risk management of trading algorithms and the enhancement of regulatory oversight over their use. White further noted that exchanges and FINRA have an obligation to provide data to the SIPs in a way that is not unreasonably discriminatory. They are not allowed to transmit data to direct customers any sooner than they transmit data to the SIP, and the technology used for transmitting data to the SIP must be on a par with what is used for transmitting data to direct feeds. The exchanges and FINRA are asked to consider including a time stamp in the consolidated data feeds that indicates when a trading venue, for example, processed the display of an order or execution of a trade.
Enhancing Market Transparency and Examining Trading Venue Regulation
SEC staff will prepare a recommendation to the Commission to expand the information about alternative trading system (“ATS”) operations submitted to the SEC and to make the information available to the public. The Commission will also study whether the trade- through rule of Regulation NMS has contributed to excessive fragmentation across all types of venues.
Mitigating Broker Conflicts
SEC staff are preparing a rule proposal that would enhance order routing disclosures. The proposal would require disclosure of the customer-specific information that a broker is expected to provide to each institutional customer on request. Exchanges are being asked to review their order types and how they operate in practice. Exchanges will be expected to consider rule changes to help clarify the nature of their order types and how they interact with each other, and how they support fair, orderly, and efficient markets. View the text of White’s prepared remarks here. Separately, the SEC published a list of all alternative trading systems with effective registrations as of May 1, 2014.