Exclusive Online Only ContentSEC To Develop Concept Release on Market Structure
January 13, 2010
In a second unanimous decision Wednesday, the Securities and Exchange Commission approved issuing a concept release seeking comments on the structure of market changes, as electronic trading has taken hold over the past decade.
SEC Chairman Mary Schapiro noted such market changes worth review as trading speed dropping to microseconds, surging volumes of trades and smaller-sized trades as well as new types of market centers and liquidity dispersed across these venues.
At the SEC, “we must continually assess how changes in the market are affecting investors,” Schapiro said, adding, “And, we must try to understand how these changes may impact the markets in the future – so we can steer clear of any unnecessary risks.
Concept releases are few. They typically number anywhere between a handful and none a year. By comparison, the SEC issued 22 rule proposals in 2009.
The concept release follows several controversial market-structure proposals from the SEC in 2009. They included measures to control rampant short selling, a ban on orders some market centers flash to select customers, and restrictions on non-quoting market centers, known as dark pools, if they were to remain non-quoting.
The commission agreed earlier today on issuing a proposal to eliminate “naked” sponsored-access agreements, in which market participants borrow a broker-dealer’s exchange identification codes to access market centers directly and without pre-trade broker supervision.
The concept release requests market-participant input on these issues and related ones, such as the types or strategies used by high-frequency trading (HFT) firms, accounting for more than two-thirds of trades by some industry estimates, and whether their strategies benefit or harm other investors.
High-frequency traders typically rent space to “co-locate” their servers close to the market centers’ matching engines, so trades can be executed in microseconds.
The SEC asks whether that gives them an unfair advantage and, if so, should they be subject to specific trading obligations—much like the market makers of once upon a time.
The SEC also is asking whether the trading volume in dark pools has reached a point where it lessens the quality of prices on “lit” or public markets. Also under scrutiny is whether the growing number of market centers has fragmented trading and made it less efficient. The SEC currently counts 10 exchanges, five electronic communication networks (ECNs), at least 32 dark venues and a much larger number of broker-dealers who internally match trades.
The SEC has long viewed its mandate as protecting long-term investors “willing to accept the risk of equity ownership over time” and that “are essential for capital formation.”
To that end, it is seeking input also on broader questions, such as the best metrics for assessing market quality for long-term investors and whether those metrics have improved or worsened in recent years. Another is whether highly automated, high-speed market structure—such today’s, which caters to short-term traders—is fundamentally fair for most investors.
Daniel Gray, senior special counsel in the SEC’s Division of Trading and Markets, noted the difficulty in distinguishing between long-term and short-term investors.
