FIA Principal Traders Group Releases Position Paper on U.S. Equity Market Structure (with Lofchie Comment)
The FIA Principal Traders Group (the "FIA PTG") released a position paper (the "Position Paper") offering recommendations on how to simplify and "improve" U.S. equity markets.
The Position Paper recommends eliminating the order protection rule (Regulation NMS Rule 611) and the requirement to avoid displaying locked and crossed markets (Regulation NMS Rule 610(d)) which according to the Position Paper, would reduce "complexity and fragmentation" in U.S. equity markets.
According to the FIA PTG, these rules add significant complexity by (i) requiring trading venues to collect and process data from displayed trading venues to determine whether incoming orders would trade-through, lock or cross a protected order, (ii) encouraging trading venues to develop numerous order types that address how orders are to be handled if they appear to lock or cross a protected order (e.g., hide-not-slide), and (iii) contributing to the growth in the number of trading venues in recent years, many of which account for minimal trading volumes.
Additionally, the Position Paper advocates for the "clarifying and modernizing" of brokers' best execution requirements, including by (i) considering factors such as fees and rebates in addition to displayed price and (ii) updating the disclosures of order execution and routing information (Regulation NMS Rules 605 and 606).
Lofchie Comment: The changes to Reg NMS suggested by FIA PTG are quite radical; essentially, FIA PTG argues for doing away with much of Reg NMS and replacing it with a market in which traders make order routing decisions based on business judgment rather than regulatory requirements. While radical, these suggestions are essentially consistent with the views advanced by the dissenting Commissioners, including Paul Atkins, when Regulation NMS was adopted. At that time, the dissenting Commissioners argued that the very complicated rules underlying the NMS system would create a market that evolved in order to profit from regulatory arbitrage rather than a market that evolved to meet the demands of buyers and sellers.
See: Position Paper; Press Release.