Opening Remarks at the October 2015 Meeting of the Equity Market Structure Advisory Committee

Chair Mary Jo White

Oct. 27, 2015

I am very pleased to welcome you back for the October 2015 meeting of the Equity Market Structure Advisory Committee.  I want to begin by thanking each of you for your flexibility when we postponed the meeting from its originally scheduled date of September 24th.  The road closures and other security measures taken for the Pope’s visit that day would have made travel and convening the meeting very difficult.

The discussions at our inaugural meeting underscored for me how invaluable this Committee’s insights are as the Commission continues its efforts to ensure that the equity markets optimally meet the needs of investors – both large and small – and issuers of all sizes.  With the careful consideration, input, and approval of each of the Commissioners, we have been able to assemble a diverse group of widely respected experts to effectively represent the views of key stakeholders in the equity markets.  And I thank each of you again for your service.

Since we announced the formation and membership of the Committee in January, we have had requests from other market participants with valuable perspectives to join the Committee; some of those requests have been reiterated recently.  I wish we could accommodate them all.  While this was not practical, to ensure transparency of our efforts and representation of all viewpoints on a committee of this kind, we have taken a number of additional steps to broaden our means of obtaining input.  These include presentations at all Committee meetings by expert panels; the independent provision of relevant data, analysis, and public briefings by Commission staff for feedback from all interested parties; an open comment file; and a transparent public agenda.  These mechanisms are designed to ensure that the Commission and the Advisory Committee benefit from the full range of perspectives on important market structure topics.

Having said that, I believe that the Commission needs to review regularly whether the operation of these mechanisms is enabling all significant perspectives on the issues and potential policy measures to be presented.  As we move forward, we will continue to seek and encourage input from all constituencies.

I also believe the Commission must find ways to efficiently and effectively leverage the expertise of the Advisory Committee, so that it is in a position to offer advice on a variety of complex issues in a timely manner.  At our last meeting, Committee members gave us clear direction regarding the benefits of forming subcommittees permitted under the Federal Advisory Committee Act and as contemplated by the Committee’s Charter and Bylaws.  Such subcommittees would undertake a detailed review and analysis of particular market structure topics – including topics of the members’ own choosing – that will help facilitate the full Advisory Committee’s consideration of those issues.  Indeed, the use of subcommittees and the efficiencies they provide have been recognized by other Commission advisory committees formed in recent years, including the Joint CFTC-SEC Advisory Committee on Emerging Regulatory Issues and the SEC’s Investor Advisory Committee.

Steve Luparello will address subcommittees shortly in greater detail, but I want to note that any advice or recommendation of a subcommittee would, of course, be presented to and thoroughly deliberated by the full Advisory Committee at a public meeting like this one, as required by law.  If the Commission were to take any action as a result of the Committee’s advice, it would be subject to the applicable notice and comment contemplated by the Administrative Procedures Act.

Moving to today’s substantive agenda, the Advisory Committee is taking up two important and complex market structure topics:  national securities exchange (exchange) access fees and the current regulatory models for trading venues.

Exchange Access Fees

At this morning’s session, the Committee will consider exchange access fees.  Investors have a broad selection of execution venues to choose from – currently 11 equity exchanges and more than 40 alternative trading systems (ATSs).[1]  Competition for order flow among these varied venues is intense, and as a result, trading venues compete aggressively to attract and retain order flow.

One of the more widely used fee structures in the equities markets is the “maker-taker” fee structure, which attracts order flow to a venue and incentivizes the venue’s market participants to provide liquidity at the most competitive prices.  Maker-taker fees have been so widely adopted that they unquestionably impact the market’s structure.

At the last meeting, many Committee members noted that a discussion of this fee model is essential for any thorough assessment of equity market structure.  There are different views on its merits.  Proponents of the maker-taker model argue that it serves as an important competitive tool both for exchange and non-exchange markets and also promotes tight spreads.[2]  Some critics argue that it creates inherent conflicts of interest between brokers and their customers and may distort routing decisions, and that it keeps taker fees high to subsidize generous maker rebates.[3]  Other critics argue that it contributes to market fragmentation and market complexity through the proliferation of new exchange order types.[4]

Today’s discussion addressing these various views will be very valuable.

Critics of the maker-taker model have made a range of different recommendations about how to address the conflicts presented by the maker-taker model, which I am sure will be part of the discussion.[5]  Because of the pervasiveness of maker-taker fees, these recommendations must be evaluated carefully to assess the consequences, intended and unintended, of any change.  A pilot to study the issue further has been suggested and should be seriously considered.  But as the tick size pilot team can attest, a thoughtfully designed pilot needs to be carefully designed and meticulously implemented.

Regulatory Treatment of Trading Venues

The other matter that the Committee will consider this afternoon are the fundamental changes in trading venue management and operation, including the growth of trading conducted through ATSs, the impact of demutualization, and the emergence of exchange group affiliations, among other shifts.  These transformational events have led some observers to question whether the current regulatory model for trading venues is optimally serving the market as a whole and providing a level and fair playing field for all market participants.[6]

Both exchanges and ATSs compete to offer trade execution services and are subject to various Commission rules, including restrictions on the execution of trades at prices inferior to the consolidated national best bid or offer.[7]  But there are also differences.  For example, as self-regulatory organizations (SROs), exchanges are subject to a wider range of regulatory requirements than those imposed on ATSs.[8]  Exchanges must file rule changes with the Commission.[9]  And exchanges are required to undertake regulatory obligations with respect to the activities of their members.

Because ATSs are not subject to the same requirements as exchanges, they are viewed as having greater flexibility in their operations and do not incur the same level of regulatory costs.

Another difference is the participation by exchanges in national market system plans, including those governing the allocation of market data revenues.  As you know, the national market system plans are also used in a variety of contexts, such as limit up-limit down and the tick size pilot.

Over time, the perceived differences between the services provided by the exchanges and ATSs and their respective roles in the equity marketplace have diminished.  In particular, some observers have questioned whether exchanges should continue to be SROs, given most exchanges have contracted their SRO functions to another SRO, particularly FINRA.  The Commission considered many of these issues in its 2004 Concept Release Concerning Self-Regulation,[10] and more recently, I and others have stressed the importance of reviewing whether the current regulatory model makes sense for today’s markets.[11]  I look forward to hearing your views as to whether and how the SEC’s regulatory approach for trading venues should be adjusted to reflect the changes that have occurred in recent years.

Conclusion

Each of you brings to this discussion a unique and important perspective on our markets, which will be of great assistance to the Commission as we continue to explore the issues on today’s agenda.  I am confident that the work of this Committee will help the SEC immeasurably in developing ways to optimize the operation of our equity markets in a manner that promotes our mission of protecting investors, facilitating capital formation and the maintaining of fair and orderly markets.



[1] See, e.g., Laura Tuttle, Alternative Trading Systems: Description of ATS Trading in National Market System Stocks, at 2, Oct. 2013, available at http://www.sec.gov/marketstructure/research/alternative-trading-systems-march-2014.pdf (noting that, in 2013, 35 broker-dealer firms operated 44 ATSs that actively trade NMS stocks).  A list of alternative trading systems registered with the Commission is available at http://www.sec.gov/foia/ats/atslist0715.pdf (last updated Jul. 2015).

[2] See, e.g., Larry Harris, “Maker-Taker Pricing Effects on Market Quotations,” at 5 (Nov. 14, 2013), available at http://bschool.huji.ac.il/.upload/hujibusiness/Maker-taker.pdf.

[3] See, e.g., Robert Battalio, Shane A. Corwin, and Robert Jennings, “Can Brokers Have it All?  On the Relation Between Make-Take Fees and Limit Order Execution Quality,” at 5 (Mar. 31, 2015), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2367462&download=yes.

[4] See, e.g., Joe Ratterman, Chief Executive Officer, and Chris Concannon, President, BATS, “Open Letter to U.S. Securities Industry Participants Re:  Market Structure Reform Discussion,” at 1 (Jan. 6, 2015), available at http://cdn.batstrading.com/resources/newsletters/OpenLetter010615.pdf.

[5] See, e.g., Letter from Sen. Carl Levin (D-MI), to Mary Jo White, Chair, SEC (Jul. 9, 2014) available at www.hsgac.senate.gov/download/levin-letter-to-sec-chairman-mary-jo-white-re-equity-market-structure-july-15_2014; Letter from Sen. Charles Schumer (D-NY), to Mary Schapiro, Chair, SEC (May 10, 2012) available at http://www.schumer.senate.gov/record.cfm?id=336748&; and Battalio et al., supra note iii at 5.

[6] See, e.g., Letter from Theodore R. Lazo, Managing Director and Associate General Counsel, SIFMA, to Chair Mary Jo White, Commission, Re: Self-Regulatory Structure of the Securities Markets, dated July 31, 2013, (“SIFMA letter”), available at http://www.sifma.org/issues/item.aspx?id=8589944673.

[7] 15 U.S.C. 78s.

[8] 17 CFR 242.301.

[9] See SIFMA letter, supra note vi.

[10] See Concept Release Concerning Self-Regulation, Securities Exchange Act Release No. 50700 (Nov. 18, 2004), 69 FR 71256 (Dec. 8, 2004).

[11] See Speech by Chair Mary Jo White, Enhancing Our Equity Market Structure (Jun. 2014), available at http://www.sec.gov/News/Speech/Detail/Speech/1370542004312.  See also Speech by Chair Mary Jo White, Focusing on Fundamentals: The Path to Address Equity Market Structure, delivered at Securities Traders Association 80th Annual Market Structure Conference (October 2, 2013), available at http://www.sec.gov/News/Speech/Detail/Speech/1370539857459.