As the SEC’s Equity Market Structure Advisory Committee met to consider recommendations for an access fee pilot program and possible changes to the self-regulatory organization trading venue rules on immunity, NMS plan governance, the SRO rule process relating to technology changes, and the centralization of common regulatory functions, officials from Nasdaq and the NYSE criticized the lack of diversity among members of EMSAC. They complained that the recommendations reflected the lack of diversity and promoted the committee members’ self-interest.
White’s remarks. White, in opening remarks, said she was impressed by the progress that EMSAC has made and said the recommendations reflect thoughtful analysis. She added that the recommendations followed independent analysis by the SEC staff, presentations and advice from an array of panelists, and discussions at prior meetings.
In White’s view, a properly designed access fee pilot would help the staff assess a significant segment of the current capital market structure, but a number of issues will have to be ironed out. For example, the subcommittee recommended four buckets for the pilot—one would be a control, and the other three would reduce the current 30 cent access fee cap to 20 cents, 10 cents and two cents. White asked if any consideration had been given to a prohibition on access fees and rebates altogether in one of the buckets.
White was also interested in hearing about whether the pilot should apply to non-displayed liquidity and off-exchange trading venues such as ATSs, whether it should include a “trade-at” provision, and the optimal timing for the pilot.
Commissioner Michael Piwowar also expressed concern that the proposed pilot lacked a zero access fee category and hoped the members would explore that option.
Lack of committee diversity. Nasdaq Vice President and Deputy General Counsel Jeffrey Davis said he has written to Chair Mary Jo White to express his concern about the lack of retail investor representation and that of publicly traded companies on EMSAC. He said the subcommittees’ preliminary recommendations, which were released in advance of the meeting, will not help emerging companies or the issuers or holders of less liquid securities. Nasdaq has called for a change in the SEC’s one-size-fits-all regulatory approach to equity market structure, but the subcommittee recommendations do not do that. Instead, they call for increasing fees and exchanges’ liability, according to Davis.
The NYSE’s Thomas Farley said the markets are failing listed companies, which want more transparent trading and a level playing field that roots out violators. He acknowledged that Nasdaq and the NYSE were invited to participate in the subcommittee’s deliberations, but said the meetings should have been open. In his view, the proposed access fee pilot will ensure more dark trading and worse prices, and will increase competitors’ costs and liabilities. Despite numerous enforcement actions against alternative trading systems, Farley noted that the recommendations do not include any additional disclosure requirements for ATSs. He urged the SEC to start anew with a more representative committee.
Access fee pilot. Invesco’s Kevin Cronin, chair of the subcommittee, said the members did not reach a consensus on a number of issues, including whether the pilot should apply to inverted venues. In response to White’s remarks, Cronin said the subcommittee did not endorse the inclusion of a trade-at provision because it would introduce variables outside of the core of the pilot, and the tick pilot already includes a trade-at provision. Columbia University professor Charles Jones also noted that simplicity was the reason for not including the trade-at provision. It would introduce too much complexity, he explained.
Cronin also addressed Nasdaq’s and the NYSE’s criticisms. He said the subcommittee tried to ensure representation from listed companies and that both he and another member are employed by publicly traded companies. He said the exchanges’ representatives should have joined the conversation and were invited to do so.
Steve Luparello, the director of the Division of Trading and Markets, urged EMSAC to present the full committee’s recommendation to the staff as soon as possible. The staff will have to analyze the recommendations before preparing a proposal for the Commission’s consideration and, if approved, the proposal would launch another set of comments, he noted, so EMSAC’s work is more of a race to the starting line than to the finish line.
Trading venues subcommittee. FINRA’s Richard Ketchum said his subcommittee on trading venues also tried to include representatives from all industry segments and, while Nasdaq and the NYSE were invited, they chose not to participate. The subcommittee recommended that SRO rule-based liability levels be increased and applied more consistently across SROs; that NMS plan governance be revised; and that some of the SROs’ common regulatory functions be centralized under a single regulator.
With respect to NMS plan governance, the subcommittee said the process for selecting advisory committees should be formalized, the advisory committee’s role should be expanded, and the use of executive sessions should be narrowed. Luparello suggested that the subcommittee decide whether to push forward with all of its recommendations at once or to move them in order of their immediacy, which appeared to place the most urgency on the NMS plan governance issues. He urged the subcommittee to submit a formal recommendation in the next few weeks.
In earlier remarks, Piwowar said the issue of SRO immunity has piqued greater interest after a number of high profile events and agreed it is an area worth exploring. On the issue of centralizing regulatory functions, he said it is worth considering, as an alternative, whether there are benefits to having the SROs compete with one another, and suggested the comments will be particularly helpful in this area.
The subcommittees on market quality and customer issues presented updates on the matters under their jurisdiction which will be considered in greater depth at upcoming EMSAC meetings.
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