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SIFMA Equity Market Structure Roundtable

Securities Industry and Financial Markets Association (SIFMA)  

Equity Market Structure Roundtable

Tuesday, September 13, 2022

Topline

  • SIFMA CEO Ken Bentsen reiterated SIFMA’s support for many of SEC Chair Gensler’s equity market structure reform ideas but expressed concern that some of the suggested changes could impact investors’ costs by eliminating low or zero-dollar commissions or limiting order execution venues and said changes should be reviewed closely and subject to robust cost-benefit analysis.
  • Most of the discussion focused on minimum tick increments, order by order competition, auctions, and the SEC’s best execution rule.
  • Ellen Green highlighted data from NERA Economic Consulting showing the impact of the SEC’s rulemaking agenda on various aspects of capital markets.

Welcome and Introduction

In his opening remarks, Kenneth Bentsen, President and CEO of SIFMA, discussed SIFMA’s focus on U.S. equity market structure, specifically Regulation National Market Structure (Reg NMS), and Securities and Exchange Commission (SEC) Chair Gary Gensler’s comments on the topic, including Gensler’s thoughts on potential changes the Commission might propose as early as this fall, which would materially impact all market participants. He then described the efficiency, resiliency, competitiveness, and heavily regulated nature of U.S. equity markets and highlighted recommendations from SIFMA in 2013, 2014, and 2017 to the SEC and Congress designed to enhance the current structure. Next, Bentsen reiterated SIFMA’s support for many of Gensler’s reform ideas, including decreasing access fees, implementation of the new round lot sizes, and enhancements to the dissemination of odd-lot information. He also expressed concern that some of the suggested changes could impact investors’ costs by eliminating low or zero-dollar commissions or limiting order execution venues and said changes should be reviewed closely and subject to robust cost-benefit analysis.

Morning Session

Panelists

  • Moderator: Annette Nazareth, Partner, Davis Polk & Wardwell LLP
  • Robert Battalio, Professor of Finance, University of Notre Dame
  • Michael Playground, CFA, Chief Operating Officer, New York Stock Exchange
  • Doug Sifu, Chief Executive Officer, Virtu Financial
  • Hubert DeJesus, Global Head of Electronic Trading & Market Structure, BlackRock
  • Terrence Hendershott, Professor & Faculty Director, Haas School of Business, UC Berkeley
  • Adam Inzirillo, Head of US Equities, Cboe Global Markets
  • JJ Kinahan, CEO of IG North America, IG/tastytrade
  • Mehmet Kinak, Global Head of Systematic Trading & Market Structure, T. Rowe Price
  • James Martielli, CFA, CAIA, Head of Investment & Trading Services, Vanguard
  • Michael Masone, Director, Head of Americas Equities Market Structure, Citigroup
  • Joe Mecane, Head of Execution Services, Citadel Securities
  • Sapna C. Patel, Head of Americas Market Structure & Liquidity Strategy, Morgan Stanley
  • Jeffrey Starr, Senior Vice President, Charles Schwab

Minimum Pricing Increment

Panelists first discussed whether there should be changes to equity market structure. Inzirillo said the market is already efficient, any approaches should be measured and take adequate data into consideration, and that there should be regulatory harmonization across market centers. DeJesus said equity markets function exceedingly well and that more improvements could be made to market data. Cifu supported changes to Rule 605 and said any changes need to meet a high bar and be data driven. Battalio added that decision makers must be careful when making changes to tick sizes.

Panelists also discussed the significance of a tick size and the purpose of having a minimum penny tick increment and the difference between quoting increment and trading increment. They next spoke about what problem would be solved by changing trading venues’ lack of competitiveness due to lit markets pricing in penny increments while wholesalers offer sub-penny prices. Panelists also discussed smaller tick size and the Tick Pilot.

Access Fees/Rebates/Volume Tiers/Payment for Order Flow (PFOF)

Panelists discussed current issues with the thirty mils access fee cap and the potential impacts to lit markets and passive liquidity on exchanges. Panelists also spoke about some of the ramifications of volume tiers no longer being permitted by the exchanges to differentiate customer pricing and whether it would impact displayed quotes on exchanges. Turning to payment for order flow PFOF, panelists discussed the rhetoric around PFOF leading to routing conflicts and whether a ban on PFOF addresses any perceived conflicts or if broker dealers already mitigate conflicts regardless of if they accept PFOF.

National Best Bid and Offer (NBBO) – Is It a Good Measurement?

Panelists then discussed whether the NBBO is “incomplete” or “weak” since off-exchange trades are not considered. They next spoke about how changing tick sizes impacts the robustness of the NBBO and whether the SEC should create an odd lot best bid and offer so investors know the best price available in the market regardless of size.

Order-by-Order Competition/Auctions

Panelists explained whether retail and institutional flow interact and what the implications are of auctions for retail order flow in the equity markets and the considerations for a retail auction operator. Considering that exchanges can offer retail liquidity programs (RLP), which allow them to execute orders in finer tick increments, panelists spoke about whether programs can be improved to allow exchanges to compete and segregate retail flow by executing orders in increments as granular as 1/10 of a penny. Panelists discussed why auctions have not gained greater traction with retail markets and whether those reasons are a proxy for how mandated auctions would fair in the equities space.

Afternoon Session

Panelists

  • Moderator: Elad L. Roisman, Partner, Cravath, Swaine & Moore LLP; Former SEC Commissioner
  • Benny Adler, Co-Head of Stock Trading in the Americas, Chair of the Americas Shares Best Execution Committee, Goldman Sachs
  • Ashley Banfield, Co-Head, US Sector Trading, Fidelity Investments
  • Gregg E. Berman, Ph.D., Director of Market Analytics & Regulatory Structure, Citadel Securities
  • Matt Billings, Senior Vice President, Trading Services, Two Sigma
  • Mark Campbell, Head of New Business, Fidelity Center for Applied Technology, Fidelity
  • Dan Gallagher, Chief Legal Officer, Robinhood
  • Bart Green, Senior Vice President, Wells Fargo Advisors
  • Chuck Mack, Head of US Equities, Nasdaq
  • Ovi Montemayor, Managing Director, Financial Markets Services, TD Ameritrade
  • John Ramsay, Chief Market Policy Officer, IEX Group, Inc.
  • Chester Spatt, Professor of Finance, Carnegie Mellon University
  • Debbie Toennies, Managing Director, Head of Regulatory Affairs, JPMorgan Chase & Co.
  • Andrew Upward, ETF Strategist, Jane Street

NBBO – Odd Lots and New Round Lot Acceleration

Panelists discussed Chair Gensler’s thoughts around NBBO and odd and round lots and how this would impact retail investors and lead to investor confusion.

SEC’s Proposed Best execution Rule

Panelists also spoke about the SEC adopting a best execution rule, their thoughts given FINRA’s best execution rule, concerns with having both an SEC and FINRA best execution rule, and how best execution would complement the Order Protection Rule. They also spoke about any areas in which the current best execution rule can be improved and how FINRA’s guidance on best execution impacted the market over the years and affected on-exchange and off-exchange trading.

Disclosure of Order Execution Quality (SEC Rule 605)

Panelists discussed industry support for enhancing transparency and whether broker-dealers should also file monthly Rule 605 Reports. Apart from questions concerning who produces 605 reports, they spoke about some of the issues and limitations with current 605 reports with respect to the metrics themselves and what aspects need updating. Panelists were asked whether 605 should be extended to options and what the impact on 605 reports would be of adding odd lots and depth of book to the systematic investment plan (SIP). They concluded by discussing the audience for 605 reports.

For more information on this hearing, please click here.

For an archive of past SIFMA hearing coverage, please click here.