The SEC and Market Structure: Five Things to Watch

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By Rob Tricchinelli

Sept. 15 — Securities and Exchange Commission Chairman Mary Jo White's ambitious agenda to revamp U.S. equity market structure is bumping up against the reality of the calendar.

With a new president taking office in 2017, a leadership change at the SEC could follow, leaving White only a few months left to pursue her vision of stronger markets through new data collection and rulemakings.

White showed where her priorities are as the end of 2016 draws near, in a Sept. 14 speech to a Security Traders Association's conference in Washington.

She wants further action on the consolidated audit trail, an anti-disruptive trading rule, a measure to increase dark-pool transparency, a pilot program on exchange fees and the distinction between dealers and traders.

Issue 1: Audit Trail

The SEC has until Nov. 10 under its own rules to act on the consolidated audit trail, which will be a vast database of equity order and trading information to help regulators investigate market incidents.

White said Sept. 14 that further action on the order tracking system is her highest market-structure priority for the rest of 2016. Cybersecurity concerns around the trail's data, raised by industry, contributed to a delay in the agency taking further action, she told Bloomberg BNA at the sidelines of the STA conference.

National securities exchanges and the Financial Industry Regulatory Authority made the plan to build the much-anticipated trail, which has been in the works since 2012, when the SEC authorized those groups to build it.

Issue 2: Anti-Disruptive Trading

The agency is working on an anti-disruptive trading proposal, which would suppress active traders' aggressive short-term strategies during market stress when liquidity is threatened and price disruptions are likely.

It is the most complicated of a series of rule proposals White has outlined on market structure, and both SEC officials and industry stakeholders have predicted it will be the last to emerge.

A rule proposal isn't imminent, White said, because the agency first plans to release an analysis of data it has collected from industry participants. The format of that analysis is still to be determined, she told reporters.

“We think data helps lead to a better result,” Stacey Cunningham, the chief operating officer of NYSE Group, said at the conference. NYSE's proposals to the SEC must meet stringent data requirements, she said, praising the agency for taking a similar data-driven approach to the complicated rulemaking.

Issue 3: Dark Pool Disclosures

Another of White's market-structure initiatives is to require the broker-dealers that run dark pools to publicly reveal additional information about how they operate. Dark pools are alternative trading venues that aren't exchanges but still match buyers and sellers.

In November, the agency proposed that broker-dealers disclose information about negotiations with subscribers, order processing, opening and closing policies, and whether certain tiers of users get treated differently.

The commissioners should have a proposal to consider “in the coming months,” White said Sept. 14. White told reporters that the proposal would take industry feedback into account.

The proposal would modify Regulation ATS, which governs alternative trading systems that are alternatives to traditional exchanges. There are several dozen ATSes currently registered with the agency.

Issue 4: Access Fees and Rebates

The agency is planning a pilot program that would lower the rebates that exchanges give to liquidity providers and the fees that they charge the traders who take that liquidity.

The SEC will consider it in “the very near term,” White said Sept. 14.

Rebates and fees are part of the “maker-taker model,” and the recommendation for a pilot program came from the agency's Equity Market Structure Advisory Committee.

It has also been highlighted by industry advocates and academics who argue that brokers and other liquidity providers route orders to maximize the rebate without passing the savings on to their clients.

Issue 5: Trader Registration

White has advocated a rule for active proprietary traders to register as dealers, although no proposal has been made.

It is part of a regulatory push toward new rules for traders who rely heavily on proprietary algorithms to make frequent, speedy deals.

In April, the SEC approved a regulation that required algorithmic trading developers to register with the Financial Industry Regulatory Authority. The SEC has also proposed requiring FINRA registration for algo traders who transact business away from exchanges.

A challenge with these kinds of regulations is how the agency would address the longstanding distinction between dealers and traders, under which some traders who buy and sell for their own account with some frequency aren't considered dealers under the securities laws.

To contact the reporter on this story: Rob Tricchinelli in Washington at

To contact the editor responsible for this story: Susan Jenkins at

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