Commenting on the SEC’s vote on the four proposals to overhaul the equities markets, Jeff O’Connor, Head of Market Structure, Americas, at Liquidnet, said: “In the current PFOF system, wholesale market makers who pay for order flow from retail brokers, receive these order as ‘held’ – meaning the accepting market maker agrees to immediate execution. This affords accessibility and size liquidity to the retail trader. If this order is not executed via an auction, due to insufficient liquidity, does the market maker then receive this order? Is it held or not, and is the market maker still obligated to take the position?
“The SEC estimates the auctions could save retail investors ‘$1.5b annually’. The details and analysis have been relatively hurried and opaque since an auction option was announced earlier this summer. And, in fact, the transition from concept to engagement to proposal is typically considerably longer. Keep in mind Reg NMS that, when implemented in 2005, the industry engagement began in the Fall of 2002 with a series of Market Structure roundtables and industry discussions, then proposed in February 2004, and finally implemented in August of 2005. This is arguably the biggest market structure adjustment proposal since Reg NMS, why have the details been so few? And why do industry participants feel like they haven’t been properly included in the analysis?
“A typical comment period can extend out to six months. Given the uncertainty and some strong industry opposition, will this comment period be significantly delayed? Some are speculating upwards of two years, at which time the current administration may be in jeopardy of exit due to a presidential election. Will the timing of realistic implementation make this proposal a non-event?
“The load of added message traffic for an auction process will be extensive and, possibly, prohibitive from current capacity limits with networks and ports, which have a finite number of messages that can be transmitted per millisecond. How will this new load of messaging impact the latency and possible strain on current market traffic?”
