BATS Files Market Structure Rulemaking Petition with the SEC and Sends Letter to the Public (with Lofchie Comment)

BATS Global Markets ("BATS") filed a petition for rulemaking with the SEC regarding Regulation NMS market structure reform, and issued a letter to market participants asking them to participate in a "constructive dialogue" intended to improve U.S. equity markets.

The petition, which was sent to the SEC on January 21, 2015, requests that the SEC adopt amendments to Regulation NMS Rules 600, 605, 606 and 610, as well as the consolidated tape plan in Rule 608. The petition focuses on three measures that BATS believes will improve the equity markets: (i) reducing access fees generally, (ii) requiring firms to provide greater transparency as to their order handling procedures, and (iii) eliminating benefits provided to small exchanges.

In the petition, BATS advocated for tiered access fees, starting at $.0005 for the most liquid securities. Tiered access fees, BATS contends, offer a "meaningful incentive" for liquidity providers to display quotes on narrow spreads. BATS also stated that Rules 605 and 606 should be amended to require ATSs to provide customers with their rules of operation, including disclosure of achieved execution quality on a broker-by-broker basis.

BATS also encouraged the SEC to revise Regulation NMS to stipulate that until an exchange or other currently protected market center achieves greater than 1% share of CADV in any rolling three-month period, it must (i) no longer be protected under the trade-through rule, and (ii) not share in or receive any NMS plan market data revenue.

In its open letter to securities industry participants, BATS stated that it is seeking feedback from market participants to create a consensus for market structure reform. Topics discussed in the letter included the following:

• a greater than 80% fee reduction in the access fee cap for the most liquid securities, and a tiered approach to access fee reductions for less-liquid securities, benefiting issuers and investors;
• greater standardized transparency into broker order routing and ATS order handling;
• the implementation of a threshold of 1% market share before a market is considered protected under Regulation NMS or is eligible to participate in the national market system plans – a standard which would reduce fragmentation and market complexity;
• the elimination of the current one-size-fits-all approach to equity market structure; and
• the reduction of additional market complexity, such as that which is caused by federally mandated routing practices (e.g., Trade-At) or anti-competitive pricing restrictions (e.g., the ban on "Maker Taker").

Lofchie Comment: Philosophically, the BATS letter reflects the viewpoint that the markets will work better based on (i) good disclosure and (ii) individual investor decision making, as opposed to governmental decision making. A rebuttal to this argument hinges on proving (or at least asserting) that, over the long run, decisions made by individuals result in a worse aggregate outcome than choices made by the government. It is not an impossible argument to make, but in the case of NMS, neither is it an easy one, since many of the most significant problems of the current market structure (particularly market fragmentation) can be traced to the dictates of NMS.

See: BATS Petition to the SEC.