Regulation must keep pace with market changes to stay relevant and achieve policy goals, according to IEX Exchange, a national securities exchange, facilitating the trading of U.S. equities.
“In the nearly two decades since Regulation NMS was enacted, the markets have changed dramatically in ways that we believe not only justify, but require, a significant overhauling of the structure and regulation, commented Ronan Ryan, Co-Founder & President of IEX Group.
On March 20, IEX Exchange filed their response to the SEC’s proposed changes to the reforms related to Regulation NMS, which include limiting maximum fees exchanges can charge, trading increments, and “tick sizes”.
In December 2022, the Securities and Exchange Commission (SEC) proposed to amend certain rules under Regulation NMS to adopt variable minimum pricing increments, or “tick sizes,” for the quoting and trading of NMS stocks, reduce access fee caps for protected quotations, and accelerate the transparency of the best priced orders available in the market.
The SEC’s proposed changes to Reg NMS are appropriately focused on huge changes in the market since the rule set was adopted in 2005, according to IEX.
They include: an explosion in volume and speed of trading (volumes have tripled and execution time has gone from seconds to microseconds); substantial fragmentation in market venues from a few dominant exchanges to 16 exchanges and 30-plus ATSs; a trend away from “lit” exchange trading to “dark” trading (dark venues now handle close to half of all volume); a decline in broker competition and an increase in concentration in handling retail orders; a handful of firms now handle almost all retail orders, and the proportion of these orders that are “internalized” is now one-fourth of all market volume.
In addition, the costs to access exchange fees have stayed high, at the maximum rate allowed, while almost all fees collected are transferred to a small number of trading firms in the form of rebates, according to IEX.
“The SEC has clearly signaled that its overriding goal in proposing the reform is to serve the investing public, and we strongly agree that this must be the guiding purpose of the reforms,” Ryan said.
“We are supportive of the Reg NMS reforms proposed by the SEC,” he added.
On the individual proposals, IEX thinks that the SEC should reduce the cap on fees exchanges can charge to access their quotes by two-thirds, from $0.003 to $0.001 per share, or from “30 mils” to “10 mils.”
IEX also believes that the SEC should reduce the tick size to one half-cent for all stocks that have an average spread of up to 2 cents, while keeping the existing one cent tick size for all others.
The SEC proposal would apply 4 different tick sizes, at levels of one-tenth cent, one-fifth cent, one-half cent, and one cent to different categories of stocks.
“Our recommendation differs from some industry proposals that favor a half-cent tick for stocks with a narrow spread, in that we would apply that tick to a somewhat larger set of securities.”
In addition, IEX thinks that the SEC should set a minimum trading increment of $0.001 per share (one-tenth cent) for all retail execution systems.
According to Brad Katsuyama, Co-Founder and CEO of IEX Group, anytime technology outpaces regulation, middlemen and intermediaries can profit significantly from the gaps and loopholes created.
“It has been nearly 20 years since the last major regulatory change in the stock market, making it hard to argue that modernizing outdated rules will be bad for investors,” he said.
“We commend the SEC for issuing these proposals and being open to adjustments and feedback,” he said.
“We believe the vast majority of market participants—from large institutional investors to individual retail investors— think that modernizing our rules is a positive step forward,” he added.
