Ensuring Deep and Liquid Equity Markets


There has never been a better time to be an investor. The U.S. equity markets continue to be among the deepest, most liquid and most efficient in the world, with investors enjoying narrow spreads, low transaction costs and fast execution speeds. Investors also benefit from zero commissions which has helped to democratize the equity markets by providing access to new investors as evidenced by the growth in retail trading. Not only do retail investors benefit from inexpensive access to the markets, but they also enjoy price and size improvement when compared with the National Best Bid or Offer (NBBO).

Efficient and resilient market structure is key to sustaining investor confidence and participation in the equity markets. Equity markets are the public face of finance and are often seen as a barometer of the overall health of the economy. In that sense, a thriving market for new issues of publicly offered equity securities, including the initial public offering (IPO) market and direct listings, is perhaps the most direct and tangible evidence of an economy where new businesses have confidence in their future prospects. Businesses most often seek to access a larger pool of public capital to allow for the next stage of their growth and, ideally, job creation follows.

Why Market Structure and Liquidity Matter

Market structure can drive liquidity and trade costs. Therefore, market participants continually strive to create the most efficient markets. This includes adapting new technologies to achieve operational efficiencies, searching for new ways to transact and, generally, sculpting optimizing market structure to maximize efficiencies.

Market liquidity is the ability to efficiently buy/sell securities without causing a substantial change in the price of the asset and is important as it impacts trade costs and therefore affects returns to investors. When routing an order, whether directly to an exchange or to an executed off-exchange market center, firms balance the likelihood of execution against price/size improvement. Market makers exist to provide liquidity in securities and execute customer trades, playing an important role in equity market structure by enabling liquidity and balancing buy and sell demand.

Efficient and resilient market structure is key to sustaining investor confidence and participation in the equity markets. The evolution of equity market structure – including capital formation, market data and self- regulatory organization (SRO) structure – is a key priority for SIFMA.

As the U.S. Securities and Exchange Commission considers significant changes to equity and options market structure, we look forward to continued engagement on these issues to ensure we meet the shared goal of regulators and market participants: to promote market resiliency and ensure the U.S. equity markets continue to benefit investors and play an essential role in capital formation.

Some of the specific market structure regulations currently under discussion include:

Order Execution: Order routing is the process by which an order goes from the end user customer through execution (or cancellation). It has become more complex in recent years due to the proliferation of execution venues. By law, brokers are obligated to provide best execution for their customers and must consider numerous factors as part of their rigorous best execution analysis.

Payment For Order Flow: PFOF is generally understood as the practice of exchanges and market makers either directly or through exchange-sponsored programs providing payment to brokers in return for the brokers routing their customer order flow to them. PFOF is governed by several regulatory requirements that are designed to ensure investors receive best execution and transparency, including FINRA Rule 5310, SEC Rule 10b-10, and SEC Rule 606.

Short Selling: The terms “short selling” or “shorting” generally refer to transactions whereby a person sells securities that they does not own. It is a critical tool used, for instance, by market makers to facilitate liquidity in the market. Many regulations currently govern short selling, including notably Rules 201, 203(b)(1) and 204 of Regulation SHO and SRO short interest reporting.

Securities Lending: SIFMA is also actively engaged with the U.S. Securities and Exchange Commission on their proposed rule to increase transparency in the securities lending market, specifically by increasing the availability of information regarding securities lending transactions both to regulators and the public.

Net Capital Requirements: Net capital is a measure of a broker-dealer’s liquidity. Two notable SEC rules cover broker-dealer financial responsibility requirements: SEC Rules 15c3-1 and 15c3-3.

Buying on Margin: Buying on margin means borrowing money from a brokerage firm to purchase a security. A “margin account” is a type of brokerage account in which the broker-dealer lends the investor cash, using the securities in the account as collateral, to purchase securities. Notable margin requirements include Federal Reserve Board Regulation T as well SRO rules, including the rules of FINRA.

Market Data Reform

Market data is information about current stock prices, recent trades, and supply-and-demand levels at national securities exchanges. Access to this information is essential to America’s world-leading capital markets because retail investors and market professionals need the most complete and up-to-date market information possible to make informed investing and order routing decisions. Because exchanges control that information, they have enormous pricing power over the cost to access the data.

Market data reform should focus on promoting competition, supporting efficient markets, and providing a transparent and fair system for all investors. SIFMA has long argued that exchange market data fee increases are inconsistent with the exchanges’ actual costs in collecting and distributing market data and thus constitute an excessive mark-up over costs. In August 2021, the SEC approved a new single national market system plan governing the public dissemination of real-time consolidated equity market data for national market system (NMS) stocks. Known as the CT Plan, this new plan consolidates the three current market data plans into a single plan to govern the distribution of equity market data, reducing duplication between the plans, and eliminating exchanges’ conflicts of interest as operators of the SIPs by making other structural changes to the distribution of market data. In addition, the SEC in December 2020 adopted rules to modernize the infrastructure for the collection, consolidation, and dissemination of market data for NMS stocks. Modernization of this infrastructure has been a SIFMA priority for many years as it has not been significantly updated since its initial implementation in the late 1970s. The Market Data Infrastructure rule significantly expands the content of NMS market data to better meet the needs of retail and institutional investors in today’s equity markets.


This is an extract from SIFMA’s 2022 Capital Markets Outlook: