Senate Subcommittee Holds Hearing on Equity Market Structure (with Delta Strategy Summary)

The U.S. Senate Committee on Banking, Housing, and Urban Affairs Subcommittee on Securities, Insurance and Investment conducted a hearing to discuss regulatory efforts to strengthen the U.S. equity market structure. The hearing featured testimony by SEC Director of the Division of Trading and Markets Stephen Luparello and FINRA Chair and CEO Richard Ketchum.

In his remarks regarding equity market structure, Mr. Luparello discussed the NYSE trading suspension on July 8, 2015, and pointed out that the observations from the "Data Highlight" published by the Office of Analytics and Research demonstrate "the need for continued emphasis on systems reliance and integrity." In addition, he noted that SEC staff continues to examine the broad spectrum of issues related to the price volatility that occurred on August 24, 2015, which include:

  • "factors that may have been associated with volatility in [exchange traded products] and other securities, including the nature of selling pressure, sources of liquidity provision, and, for [exchange-traded products], create and redemption activity";

  • the effect of Regulation SHO short-sale restrictions;

  • "the opening process on primary listing exchanges, including the nature of trading prior to and immediately after the opening auction on the primary listing exchange";

  • "the reopening process following [Limit Up-Limit Down ('LULD')] pauses, including the nature of participants in the reopening auctions on primary listing exchanges and the rules and practices employed by exchanges in connection with reopenings";

  • the operation of the LULD Plan, "particularly as it applies in the period following the opening of regular trading hours and to reopenings following LULD pauses"; and

  • "the operation of market-wide circuit breakers, particularly as they apply in the period following the opening of regular trading hours."

Mr. Luparello also outlined a series of SEC regulatory initiatives concerning equity market structure: (i) preventing market instability; (ii) addressing high frequency trading; (iii) implementing a consolidated audit trail; (iv) enhancing market transparency and examining trade venue regulation; and (v) mitigating broker conflicts.

Chair Ketchum remarked that despite the benefits from the "rise of automation" investors "are now able to trade much more quickly and cheaply than ever before," there are "potential inefficiencies in today’s market structure that [regulators] must continually evaluate to make sure markets are fair, transparent and liquid." As a member of the SEC Equity Market Structure Advisory Committee ("EMSAC"), Chair Ketchum noted that EMSAC is specifically reviewing: (i) whether "Regulation NMS rules on limiting trade throughs, capping access fees, and preventing locked or crossed markets continue to serve their intended purpose . . . to bolster investor protection"; (ii) the operation of LULD; and (iii) whether firms could better educate their customers about the risk of market and stop orders.

Further hearing testimonies and discussion relating to regulatory reforms to improve equity market structure are provided in the attached Delta Strategy summary.

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