SEC’s ‘Reg NMS II’ Plan Assessed

Terry Flanagan

The U.S. Securities and Exchange Commission’s move to modernize market data infrastructure is an opportunity to improve the system at the margin, but it also presents risks that going too far will be counterproductive.

That was the general consensus of a May 8 Nasdaq-hosted webinar that convened market-structure experts to discuss ‘Reg NMS II: The Impact of Redesigning Equity Market Structure’.

Justin Schack,
Rosenblatt Securities

Justin Schack, Managing Director and Partner at Rosenblatt Securities, noted that people complain about the complexity of equity market structure, but ultimately equity markets produce good outcomes for the two most important stakeholders: end-user investors and corporate issuers.  

“Let’s not mess with something that is not fundamentally broken,” Schack said. “There are things you can do around the edges and tweaks you can make,” but an overhaul is not indicated, he said. 

The SEC in February proposed to update and expand the content of national market system (NMS) data, which has not been done in a significant way since the 1970s. The regulator seeks to open up data provisioning to competition for the first time, with the goal of enabling all market participants to access and benefit from the expanded content.   

Tal Cohen, Nasdaq

Nasdaq “favors an incremental and exacting approach to change,” said Tal Cohen, EVP and Head of North American Markets at the exchange operator. The SEC’s Equity Market Structure Advisory Committee favors a similar way forward, Cohen noted. 

“That doesn’t mean there aren’t opportunities to modernize our regulatory framework or adjust ‘one size fits all’ rules,” Cohen said. “It’s just a matter of what we focus on and how we approach it.” 

Regulatory goals should include improving the resiliency of infrastructure, eliminating single points of failure, and introducing ‘guardrails’ where it makes sense. More broadly, “any comprehensive revision to the rules that govern our maret should consider whether you introduce new levels of complexity or expose us to new risk,” Cohen said. 

Aside from opening up the provisioning of NMS data to competition, other specific areas the SEC seeks to address include best bids and best offers for round-lot sized orders; redefining the order-size threshold for protected quotations; and new rules around ‘depth of book’ data.  

It’s an open question how the SEC initiative will play out over time, but there is some optimism that the end result will be a net benefit. About half of respondents to a poll conducted during the Nasdaq webinar said they support the SEC initiative.

“Changes are a long time coming. Some of this has been discussed over many years,” said Bojan Petrovich, Executive Director and Head of Trading at JP Morgan Asset Management. 

“This is an opportunity to challenge ourselves to improve markets and set a higher bar. There are no easy answers but I don’t think anything is insurmountable.”

The comment period for the SEC’s data-infrastructure modernization initiative ends May 26.