The Securities and Exchange Commission is mulling changes designed to update and reshape segments of the U.S. equity markets, with potential implications for institutional investors that have drawn praise and criticism.
In December, the SEC issued four rule proposals, each with varying levels of complexity and controversy. The four proposals total more than 1,600 pages and had simultaneous public comment periods that closed March 31, drawing hundreds of responses.
"These are such important changes in market structure that have not been proposed or changed in almost 20 years," said Ronan Ryan, New York-based president and co-founder of IEX Group Inc., which operates the IEX Exchange.
The SEC in 2005 established Regulation National Market System, or Reg NMS, to modernize the U.S. equity system, and Mr. Ryan said the regulation needs an update. "It would be an absolute, unequivocal shame if nothing were to change," he added.
Others are supportive of changes to Reg NMS but have myriad concerns with the SEC's proposals.
"As a baseline matter, the SEC failed to identify a market failure that would justify the dramatic structural changes proposed, yet the proposals, individually and together, would result in fundamental changes with uncertain and consequential results," Kenneth E. Bentsen Jr., president and CEO of the Securities Industry and Financial Markets Association, Washington, said in a statement.
The proposals in question would:
- Lower trading increments and access fees on exchanges, including amending minimum pricing increments, also known as tick sizes, to establish a variable minimum pricing increment model that would apply to both the quoting and trading of NMS stocks.
- Broaden the entities subject to a disclosure rule, which requires a market center that trades stocks to make public monthly electronic execution reports that include uniform statistical measures of execution quality. The entities that would have to file the reports include broker-dealers who introduce or carry 100,000 or more customer accounts; single-dealer platforms; and entities that would operate proposed qualified auctions.
- Require certain retail equity orders be exposed to open auctions before such orders could be executed internally by any trading center that restricts order-by-order competition.
- Establish a best execution standard for brokers, dealers, government securities brokers, government securities dealers and municipal securities dealers to use "reasonable diligence to ascertain the best market for the security and buy or sell in such market so that the resultant price to the customer is as favorable as possible under prevailing market conditions," according to an SEC fact sheet.