Survey Blog Summary
Survey: What the Buyside Really Thinks About the SEC’s Reg NMS Proposal
In December 2022, the SEC shared four distinct proposals to update U.S. equity market structure:
- Regulation NMS: Minimum Pricing Increments, Access Fees, and Transparency of Better Priced Orders
- Disclosure of Order Execution Information
- Order Competition Rule
- Regulation Best Execution
The first, known as Reg NMS, offers the most direct opportunity to update the current national market system to make the stock market more transparent and competitive for investors. Reg NMS was last updated in 2005 – nearly twenty years ago.
Because much has changed in twenty years, and because American households own $38 trillion of equities– largely in mutual funds and retirement plans–representing over 59% of the U.S. equity market, IEX Exchange went directly to the investor community to hear their perspectives on how Regulation NMS could be modernized to better support their needs.
IEX Exchange surveyed the buyside and heard back from 217 institutional investors across mutual funds, pensions, endowments, hedge funds, RIAs, and private wealth funds.
Findings from our survey are summarized below, with the full article on results, authored by IEX Exchange President and Co-Founder Ronan Ryan, availablehere.
The Findings:
- The majority of investors agree that U.S. equity market regulation needs to be updated to keep pace with technological advancements and market changes.
94% of institutional investors surveyed agree that U.S. equity market regulation could be updated to keep better pace with changes in technology and participant activity.
87% of institutional investors agree that modest updates to Regulation NMS will create a more transparent, efficient, and competitive marketplace.
- The proposal to update tick sizes received mixed responses, with a significant number of investors feeling that reducing quote sizes too much would go too far.
77% of institutional investors surveyed agree that reducing quote sizes from 1 penny to 1/10 penny (10 mils) for select stocks would go too far.
68% of institutional investors agree that reducing quote sizes from 1 penny to 1/5 penny (20 mils) for select stocks would go too far.
74% of institutional investors would support a more moderate reduction in tick size from 1 cent to a 1/2 penny if quote sizes are reduced for “tick-constrained” symbols.
As an additional data point: of the asset managers and pensions that actively submitted public comment letters to the SEC on the market structure proposals, as of April 18, 2023, 100% wrote in favor of a tick size reduction to 50 mils for “tick-constrained” symbols.
- On the topic of access fees, investors expressed support for a simplified fee structure with a uniform 10 mil fee cap for all symbols. They also indicated that exchange rebates are not a determining factor in their order routing decisions.
83% of institutional investors would be in favor of a simple access fee cap structure that would have a uniform 10 mil fee cap for all symbols (reduced from the current cap of 30 mils).
75% of institutional investors agree that exchange rebates are not a deciding factor in their decision on where to route their orders and that routing is left for their broker to decide.
- Institutional investors voiced frustration with rebate tiers, suggesting that their elimination would foster a more competitive landscape.
77% of institutional investors agree that the SEC could foster a more competitive landscape among broker-dealers by eliminating exchange rebate tiers.
80% of institutional investors agree that rebates and pricing tiers create negative distortions in the competitive landscape, and markets would be more competitive if their impact was reduced.
- There was strong support for reducing the definition of “round lots” for higher-priced stocks and including an inclusive “BOLO” or “National Best Bid or Offer” for odd-lot quantities in consolidated data feeds.
80% of institutional investors are supportive of reducing the definition of “round lots” for higher-priced names.
73% of institutional investors support the creation of a “BOLO,” or a “National Best Bid or Offer” for the best quoted price in Odd Lot quantities, to be included in consolidated data feeds.
METHODOLOGY:
The IEX Institutional Investor Survey surveyed 217 market participants in April and May 2023. The survey respondents consist of institutional investors including Pensions, Hedge Funds, Mutual Funds, and Endowments – among others. The AUM of the firms represented ranged from less than $1 billion to over $1 trillion with the majority of respondents from firms that had between $1B and $500B in AUM. Respondents were asked to rank their views on the recent Reg NMS proposals on a Likert Scale.
