The Securities and Exchange Commission, in the draft of its Strategic Plan for the next five years, said one of its "initiatives" may be reviewing Regulations ATS and NMS.
Released yesterday, the Strategic Plan for 2010 to 2015 outlines a range of activities the SEC is working on. It lays out the SEC’s goals and planned initiatives, as well as performance measures the Commission will use to assess the results it achieves. Besides trading issues, the focus includes promoting high-quality accounting standards, strengthening oversight of investment advisers and broker-dealers, and other issues aimed at improving investor confidence in securities regulation.
The publication of the draft Strategic Plan comes at a time of great turbulence for the SEC as the Administration pursues a goal of broad regulatory overhaul. The Strategic Plan is open for comments until Nov. 16. The plan is re-crafted every five years.
One of the potential initiatives highlighted in the SEC’s plans for the trading industry is "updating Commission rules and regulations, such as Regulation ATS and Regulation NMS, to reflect market structure developments," according to the document. This is one of several elements intended to "foster a strong market structure."
The SEC did not provide specifics about which rules contained in those big regulations are under the microscope. The two regulations, along with decimalization, have had a dramatic effect on the structure of the equities markets. One of the biggest rules in Reg NMS is the trade-through rule. Access fees, sub-penny pricing and market data are the other three pillars of Reg NMS. Reg ATS focused on alternative trading systems, including dark pools.
Regs ATS and NMS have led to fragmentation of trading venues, the rise of dark pools, the rapid growth of equities trading volume, and the arrival of new players providing liquidity to investors and other traders. These changes, according to many academic studies and reports, have also made the markets more efficient for many investors. Institutional trading costs have decreased over the years and spreads have tightened.
The SEC said its upcoming regulatory efforts could include enhancing post-trade transparency of dark pools to "address market fragmentation and facilitate best execution." The SEC didn’t specify other rules it might reevaluate in the coming months, but SEC officials have said on several occasions that the regulator plans to address the threshold for dark pools’ display and fair access requirements in Reg ATS. The expectation in the industry is that these changes are likely to come this fall in the form of specific rules.
The SEC also noted that one of its initiatives may be "strengthening the incentives for investors to display trading interest, and thereby contribute to the public price discovery process." Again, the SEC did not elaborate, but efforts to strengthen these incentives could involve alterations to the trade-through rule in Reg NMS.
The Commission also brought up high-frequency trading. Another initiative possibly on the SEC’s plate is "reviewing the impact of algorithmic and other automated trading on the markets, including its contribution to market volatility and, if warranted, developing an appropriate policy response," the Commission said. According to market participants, the SEC’s focus is on whether the presence of so much high-frequency trading–which includes a range of strategies that together represent about two-thirds of the industry’s volume–may affect investors’ execution quality and intraday stock volatility.
The SEC has been gathering information about high-frequency trading in recent months. At an Investment Company Institute conference last month, James Brigagliano, co-acting director of the Commission’s Division of Trading and Markets, said the regulator is planning a broad concept release to explore a number of market structure issues. Among other topics, the concept release, "will be seeking more information to better understand the market impact of various trading strategies and systems," he said.
Brigagliano told reporters after the conference that high trading volumes and high cancel-to-trade rates are issues worth exploring by the SEC. "What impact could that have?" he said. "Does that kind of trading reduce spreads, or is it market-neutral?" He noted that the SEC is still acquiring information and that high-frequency trading is not under the gun. "It may be fine," he said. "We’re not pre-judging."
The SEC document released yesterday also discussed the options industry. The SEC said it may consider rulemaking to promote "fair, efficient and non-discriminatory access to exchanges’ quotations." This may have been a reference to the use of flash orders in options, although the SEC did not explain its statement. The regulator will also pursue "uniform disclosure of execution quality statistics" and may address the appropriate scope of the penny pilot expansion.
