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With the comment period over for the U.S. Securities and Exchange Commission’s equity market structure proposals, the flurry of comment letters make it clear there is industry concern that the regulator is taking on too much at once and hasn’t provided enough supporting evidence to show that the changes will be an improvement.
Nasdaq, which operates the largest U.S. equity exchange by trading volume, weighed in on the SEC’s proposals on March 30. Befitting the more than 1,600 pages of SEC proposals, Nasdaq’s comment letter runs 52 pages and includes more than a dozen charts and graphs and multiple data points. The exchange operator also set up a web portal that includes an executive summary, a February webinar, and additional relevant analysis.
“Nasdaq supports market modernization, provided that it accounts for the mature, interconnected, and complex nature of the market ecosystem,” the comment letter stated. “Reform should support a strong and robust National Best Bid and Offer (“NBBO”) as well as the competitiveness of transparent exchanges whose displayed quotes form the NBBO.”
The exchange operator supports adjusting minimum tick sizes to better reflect the trading dynamics of Reg NMS securities, by adding one tick size below one penny – at $0.005 – and possibly a wider minimum tick size of $0.05 for higher-priced and less liquid securities. “It is important to recalibrate the proposal to avoid harming displayed liquidity and widening spreads,” Nasdaq said.
The SEC’s proposal to reduce access fee caps for protected quotations “risks weakening the NBBO by restricting exchanges’ ability to offer meaningful rebates to encourage more liquidity and tighter spreads that underpin the NBBO.” Nasdaq recommends the SEC scale back its plan and adopt only a fee cap of $0.0015 for securities in the $0.005 tick size bucket.
Nasdaq agrees with the SEC’s proposal to accelerate the implementation of pending provisions of its Market Data Infrastructure (“MDI”) Rule that would re-define the concept of “round lots” and incorporate odd-lots into the SIP feeds, but the firm said the industry needs more than the 90-day implementation timeline the SEC is allowing for.
The exchange operator affirms the SEC’s proposed Regulation Best Execution to the extent it provides clarity to broker dealers and improves investor outcomes, but has some concerns that the proposal lacks detail and could potentially create confusion and duplication with existing industry best-ex frameworks. It also supports the Commission’s proposal to modernize and improve Rule 605 to provide broker-dealers and investors with more relevant, comprehensive, and understandable information.
Perhaps the most controversial SEC proposal is its plan to require certain orders of individual investors to go through a new auction mechanism before being executed by any trading center. Nasdaq supports the goal of bringing retail and institutional investors together in a competitive environment but cautions that the SEC should wait to adopt this Proposal until after it implements its other Proposals and studies their impact and effectiveness. Nasdaq goes on to say that, “the SEC risks too much by solely focusing on qualified auctions.” Instead Nasdaq suggests the SEC consider alternatives such as defining “a minimum price improvement threshold (e.g., a percentage of the spread) that broker-dealers must meet in order to internalize retail order flow.” Nasdaq also recommends that the SEC permit lit markets the freedom to propose their own innovative solutions for attracting retail orders that are not internalized.
Nasdaq is not alone in sharing feedback with the Commission – other comment letters also express worry. SIFMA said it supports efforts to improve markets through increased disclosure, transparency, yet the industry group said the SEC “failed to identify a market failure that would justify the dramatic structural changes proposed…(and) failed to provide an analysis of cumulative and interactive effects of the four proposals.” The Managed Funds Association(MFA) said it “supports some of the more targeted proposed changes from the SEC but argues that the more far-reaching proposals could be disruptive and counterproductive.” Recent panels hosted by STANY and Bloomberg Intelligence, also amplify common industry concerns.
The regulator has the right end goals in mind, and Nasdaq applauds the Commission for highlighting the inefficiencies that exist in US equity markets, but its specific plan to get there needs adjusting.
“Whenever possible, we recommend that equity market structure reforms be incremental and pragmatic and avoid undue risks, costs, and burdens,” said Chuck Mack, Head of Strategy and Public Policy, North American Markets, Nasdaq. “Reforms are most likely to succeed if they are pursued through a process that is methodical, backed by data, and which reflects healthy industry dialog and debate. Most importantly, we believe that reforms should serve the interests of investors by protecting them and improving their outcomes.”
