SEC Chair Jay Clayton and Division Director Brett Redfearn Discuss Equity Data and Trading Rules

Steven Lofchie Commentary by Steven Lofchie

In a "dialogue" held at Fordham University, SEC Chair Jay Clayton and Director of Division of Trading and Markets Brett Redfearn discussed (i) improving liquidity for thinly traded securities, (ii) revising SEA Rule 15c2-11, ("Initiation or resumption of quotations without specific information"), as well as the rules applicable to the execution of trades in penny stocks for retail investors and (iii) the deficiencies in "core" market data as compared to proprietary data.

On market data, the regulators expressed concern about the current "two-tiered" system. The "core" tier is the consolidated public data feeds distributed by the exchanges and FINRA under the national market system rules. The second tier includes the "array of proprietary data processing and access services that the exchanges and other providers sell to the marketplace." Mr. Clayton stated that some market participants believe that core data was "[not] sufficient for brokers to achieve best execution for their customers."

Mr. Redfearn identified the key areas related to core data that the SEC staff will explore, including:

  • speed by which core data is available;

  • content of core data (e.g., "there are many high-priced stocks where the best quote in proprietary data may have significant value and be better than the best quote in core data");

  • depth (e.g., staff will reexamine whether core data should be expanded to include liquidity); and

  • governance of the national market systems plans that oversee the distribution of core data.

On the subject of thinly traded stocks, the regulators suggested that an issuer might have the option of suspending unlisted trading privileges in that stock, thus concentrating all exchange liquidity on the single exchange where the stock was listed. OTC trading in the security still would be permitted.

Mr. Clayton expressed concern with Exchange Act Rule 15c2-11 stating that he believed broker-dealers were providing quotes in securities as to which there is insufficient information available to retail investors. He also stated that he was confident that "more can be done to help prevent fraud and manipulation in penny stocks." Mr. Redfearn indicated that the SEC would be revisiting Exchange Act Rule 15g-9 ("Sales practice requirements for certain low-priced securities") and related Exchange Act Rule 3a51-1 ("Definition of 'penny stock'").

Commentary

Ownership of market data, and the rights to profit by the sale of market data, are important drivers of profitability in the securities industry. Should quote and trade execution data belong to (i) the market on which a transaction was quoted or executed, (ii) the broker through which the order or trade was generated, (iii) the market participant(s) who originated the order or execution, or (iv) the public? Even once the question of ownership is determined, further questions arise as to limitations on the price at which data may be sold, or as to other terms of sale (e.g., speed of distribution). The answers to those questions will have an impact on the potential profitability, or even viability, of market participants and intermediaries.

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