FLASH FRIDAY is a weekly content series looking at the past, present and future of capital markets trading and technology. FLASH FRIDAY is sponsored by Instinet, a Nomura company.
This week, the SEC approved historic changes to Reg NMS in a 5-0 vote, aiming to promote more competitive pricing and reduce investor costs on the $55 trillion U.S. equities markets.
Some market participants and observers are wary of how the changes will impact liquidity and trading costs, but others say they should help stock exchanges compete with off-exchange trading venues, which represent nearly half of trading volume and can already offer smaller price increments.
According to John Ramsay, Chief Market Policy Officer, IEX, amending 19-year old rules is a complicated task: “In our opinion the SEC took the time that it felt it needed to get the answers right and therefore secure a 5-0 Commission vote.”
The fact that it was unanimous reflects how hard the SEC worked to take into account the comments of many investors and industry participants, he noted.
“At IEX, we believe Reg NMS modernization will enhance capital markets,” Ramsay told Traders Magazine.
Khody Azmoon, CEO and co-founder, BLOX Markets, added that although “we and others initially expected this to be addressed in Q2”, the SEC was clear about adhering to their established rule-making process and “wouldn’t rush for political reasons ahead of the next election”.
“To their credit, they managed to finalize it before the end of Q3, even when some in the industry were unsure if that timeline was feasible,” he said.
IEX believes there will be definite advantages to investors in terms of obtaining lowering trading costs, lowered fees to access exchange quotes and other benefits.
“We believe that the market more generally will benefit from an updated set of requirements that are designed to meet the trading needs of 2024 rather than 2005 when the rules were put in place,” he said.
In addition, IEX believes that this policy will create more incentives for exchanges to compete among each other on the basis of quality of execution, not just on the basis of variations in pricing.
“We hope that it will reduce some of the crazy complexity that exists in exchange pricing schedules now and encourage attention on where it matters most, which is what is the outcome for investors,” Ramsay said.
Meanwhile, BLOX Markets believes the underlying retail investor will gain the most from these changes.
“Their execution quality will improve, while intermediaries such as wholesale market makers may bear the cost through tighter spreads and lower exchange rebates,” Azmoon said.
“We have a positive outlook on the equity market structure amendments regarding Tick Sizes, Access Fees, and Transparency of Better Priced Orders, as these changes are likely to benefit the underlying retail investor the most,” he added.
When asked if IEX expects any other changes in market structure until the end of the year, Ramsay said: “We don’t have a crystal ball into what the regulators may specifically be thinking about but we don’t foresee any significant new initiatives affecting equity markets to be proposed near-term.”
Azmoon added: “We’ve heard that the Regulation Best Execution proposal is a priority for Chair Gensler and that he intends to advance it. However, the SEC has expressed in the past that since it impacts multiple asset classes, it requires careful consideration. So, we’ll have to wait and see.”
