Equity Leaders Summit panellists are wary of the regulator’s next move.
The U.S. Securities and Exchange Commission’s equity market structure proposals came under review Tuesday morning at WBR’s Equity Leaders Summit (ELS) in Miami.
The SEC unveiled the four proposals in December 2022 and the regulator is expected to follow up as soon as Q1 with more guidance as to what will move forward, and in what form.
The ELS Keynote Panel, Navigating the New Market Structure Regime in 2024, first took a big-picture assessment of the SEC’s broad aims.
Panellists agreed that the SEC is trying to do too much at once, but the alternative of making incremental changes would take too long for an SEC that may have different leadership after the U.S. presidential election in November, so the regulator feels the need for a “big bang” approach.
Eric Stockland, managing director, electronic trading, BMO Capital Markets, said the SEC is trying to improve competition and efficiency, as well as close regulatory gaps and refresh Regulation National Market Structure (Reg NMS), which was established in 2005.
The proposals are “well-intentioned – there are parts to get behind and parts to be apprehensive about,” Stockland said. “Every one change is incremental but packaged together it’s a tsunami. It’s tough to change dozens or variables at the same time.”
Sean Paylor, Vice President and Trader, Implementation at Acadian Asset Management, noted that the SEC is trying to “reprioritize who our public markets work for,” which is end-user investors and companies who need to raise capital.
Paylor highlighted the SEC proposal that calls for certain orders of individual investors to first be exposed to competition in new auction mechanisms, before being executed internally at a trading center that restricts order-by-order competition. He said the proposal isn’t perfect, but it can help Acadian trade more efficiently by making desirable retail order flow more accessible.
“Access to liquidity is huge, and it’s becoming a bigger problem,” Paylor said. “Anything that helps us access liquidity that we can’t access currently” would be helpful, he said.
Stockland noted that institutional market participants do have some access to retail order flow via certain trading platforms, but it’s limited. “There are ways to piece it together, but the best stuff is harder to access,” he said, adding that market forces, rather than regulatory mandates, would be a better way to expand access to retail order flow.
Similarly, panelists indicated the SECs proposal to adopt variable minimum pricing increments, or tick sizes, for certain stocks makes sense conceptually, but it risks backfiring if ticks are made too narrow.
“There are a number of securities that can benefit from tighter ticks, usually lower-priced stocks, but one-tenth (of a penny) is too much,” Paylor said. “Maybe start with a half penny and go from there with an iterative approach.”
Clarity on what’s next is critical for market participants’ planning, on a number of fronts including tech spend. “There’s a lot out there, and a lot of these things have unintended consequences,” said Adam Gould, Global Head of Equities at Tradeweb. “Clients don’t know what will happen.”
Stockland said he’s constructive on the SEC’s broad intent, but it would be “scary” to have the proposals move ahead without modification.
© Markets Media Europe 2023
