SEC Fairness Marketplace creation proposal, 18 months later

On December 14, 2022, the US Securities and Exchange Commission created a spat after abandoning four proposals to redesign the equity market structure.

This used to be a huge offer. Wednesday afternoon’s release spoiled the plans of compliance officers, technologists and market making analysts, who were expecting some holiday season downtime, as the industry immediately went into research and response mode. Over the course of weeks and months, numerous analysis reports have been published, comment letters written, and individual briefings held, all to talk about the good, the terrible, and everything in between the proposals’ impact on the markets. With respect to , liquidity and buying and selling.

More than a generation and a quarter later, one in four proposals has been implemented, and the other three are pending. The industry has not lost enthusiasm in the fledgling industry, although the three proposals have made the entry process easier in terms of mobilizing readiness and to-do-list pieces, and it is not clear how long the key architects of the proposals will have. SEC Chairman Gary Gensler will remain in his seat.

Here’s an update on where the issues arise.

Amendment to Rule 605

The SEC proposed to update the disclosures required under Rule 605 of the NMS Act for Series Execution in Nationwide Market Machine Shares, the first significant update of the guidance since it was followed in 2000. Of the four equity market creation proposals, this one probably had the most trade backup, and on March 6, 2024, the SEC submitted final rule amendments.

Mark measurements/enter charges

The SEC proposed revising the minimum price increment, or “tick”, for positive NMS shares. Negative follow-up occurred but on proposals that could amend Regulations 610 and 612.

Brett Redfearn, founder of Landscape Monetary Markets Advisory and former director of trading and markets at the SEC, believes one of the three pending proposals is likely to resurface.

“The most likely market structure rule changes we can expect this year are tick sizes and access fees, a smaller version of the proposed changes to Rules 610 and 612, as well as new rounds broadcast on tape,” Redfern told Investor’s Book. With lots and odd lots.” , It is reasonable to expect that the Commission may pass it in the fall, and that it would depart substantially from the initial proposal.

The SEC has proposed denominating unused ticks at one-tenth of a cent, two-tenths of a cent, and 1/2 cent; Redfearn said the final rule is likely to contain only a half-cent tick for penny-constrained shares, although the controversial point would be regulatory overreach in the definition of penny-constrained shares.

“This approval will also include a reduction in the access fee limits in Rule 610,” Redfern said. “The big question is will we see a cap of 10 million or 15 million access fees?”

Jesse Forster, senior analyst for marketplace construction and generation at Coalition Greenwich, said the industry is trying to paint something for the proposal. “There is solid interest in experiments or pilot programs around tick size and access fees,” he noted. “The SEC’s dislike of pilots is well known, but if they were willing to listen to industry input and design a reasonable pilot program, they would get a lot of support.”

easiest execution

The SEC proposed the easiest execution of the law, which could allow the regulator to have its own personal best-before rule with the Monetary Trading Regulatory Authority (FINRA). The SEC motion sheds light on conflicting transactions during which broker-dealers handle retail orders in the moment of a potential battle of passions.

“The best execution rule has been very controversial from the beginning,” Redfern said. “There has been considerable opposition to many elements of that proposal. It is not clear how in practice the two versions of best execution should work in the world, where one is for disputed orders and one for non-disputed orders.”

Redfern said, “Most importantly, I doubt that the economic analysis providing the underlying basis for the rule remains valid even after the approval of Rules 605, 610, and 612, which completely changes the baseline. ” “So I don’t think the best execution approval is a sure thing.”

Rekha Utsav

The SEC’s proposal that has been most criticized by the trade is its proposed rule to toughen competition for retail trading orders. The theory is to make the newly created public sales mechanisms appear to hand over positive retail trade orders to additional competition and, at least theoretically, better execution for retail traders.

“I’ve heard discussion that the auction proposal is not going anywhere,” said Jim Engel, a worker schoolmaster at Georgetown College’s McDonough College of Industry and an expert on marketplace creation and law. “Maybe Gensler & Co. actually paid attention to the discussion of opposition to the plan. Even the exchanges that would potentially benefit from the plan opposed it.”

“I think the order competition rules and retail auctions have greatly reduced the chances,” said Forster of Coalition Greenwich. “The institutional community has lost interest in even discussing how they might work.”

Redfern noted, “The order competition rule has probably expired and will never come to light.” “It was not a practical proposal and was not well thought out. This was overly prescriptive and should not have been offered in this form. “I don’t think it will ever gain momentum without a comprehensively revised re-proposal.”

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The SEC is tasked with protecting ‘mom-and-pop’ traders, something Gensler has emphasized when citing fairness market creation proposals as the reason.

Market operators and retail trading platforms say the offers are too extreme and could be counterproductive due to reduced liquidity.

“It has never been easier and more affordable for retail investors to participate in the stock market,” Matt Billings, vice president, brokerage and president of Robinhood Monetary and Robinhood Securities, told Investor’s Book. “The SEC should pursue additional market structure reforms with caution and only after carefully studying the effects of its recent Rule 605 reforms. The data on retail investors’ access to the stock market and the quality of execution they receive when investing and trading do not support the aggressive reforms currently being considered by the SEC.

As the clock ticks down on explicit proposals, Georgetown’s Angel notes that the SEC is also moving slowly on smaller additional dietary issues, such as limiting-ups on exchange-traded budgets, replacing the restricted unhealthy (LULD) bands. Submission to NMS for (ETF).

Scholastic presented several theories that would explain the long management life: Gensler might also prefer alternative rule setting such as predictive information analysis; The Chairman is likely having trouble convincing the two SEC Commissioners to simply sign off on the final rules for a majority; And it’s the SEC’s way with limited resources that it wants to do its best to get it right rather than rushing into something.

“Market participants on all sides are eager for any response from the Commission regarding the pending pieces,” Forster said. “The longer this drags on, the less likely we are to see any implementation. The Speaker may be short on time between the lack of industry support and the US presidential election.

Redfearn said there was “a worrying lack of broad industry engagement” before the SEC unveiled its equity marketplace creation proposals. “That was a problem that led to more problems,” he said. “There was a desire to do a lot of things on the part of Chair Gensler, which led to proposals that were not thoroughly reviewed.”

Redfern said, “We have seen a negotiated style of rulemaking where the scope of proposed rules was intentionally very broad, so that they could be modified during the comment process, but dialed back so they would still remain aggressive.” Additionally, “In my view, the proposals generally reflect an excessively cozy relationship with the large stock exchanges and a failure to appreciate or understand the benefits of non-displayed liquidity.”

what’s coming

The next question for equity marketplace construction proposals is more muddled through the calendar, it is the end of the summer for the next few months, and then there will be pre-election season for about two months, during which regulatory action will take place politically. Can be considered ambitious. The November presidential election could result in Gensler leaving the commission before his term ends in 2026.

In an interview on June 25 at the Bloomberg Investment Conference in New York, SEC Chairman Gary Gensler did not specifically discuss equity market creation proposals, although he talked about the SEC’s inbox most of the time.

Gensler noted: “There are still some rules that we’ve proposed and that we haven’t adopted yet that we’re working on, but we’re not doing it against a clock.”

Gensler noted that it would be “honored” to loan him out as president until 2026, but if he is ousted through an overhaul within the White House, “then that’s democracy in action.”

He emphasized that the SEC is not working under any timelines around the election period in November or the establishment period in January 2025. “We are considering public feedback on rules we have proposed but not publicly adopted, but not against a clock,” Gensler said. “You can run down the field as well as run down the field, and when the referee calls the clock you see where you are.”

Redfern concluded, “I’ll bet the Chairman will consider .500” proposals. “Rule 605 has been completed, and the minimum tick and access fees have been cut. But the order competition rule is poor, and the best execution may be in trouble.”