SEC Commissioner Crenshaw Calls for More Regulation on Fixed Income and Options Markets

SEC Commissioner Caroline A. Crenshaw recommended additional regulation on the fixed income and options markets.

In a statement before the Fixed Income Forum Spring Roundtable, Ms. Crenshaw argued that as fixed income and options markets increasingly attract retail investor participation and more “hands-on investing,” they should be more heavily regulated.

Fixed Income Markets

Ms. Crenshaw said that the fixed income markets are still “considerably less transparent” and more costly to investors than other markets, such as the national market system stocks. Specifically, Ms. Crenshaw recommended:

• taking regulatory steps to address the lack of pre-trade price transparency within the fixed income market which “hinders competition, increases costs, and makes it difficult for investors to assess their execution quality”;
• enhancing visibility into market intermediaries and trading platforms within the corporate and municipal bond markets by providing investors with some of the same protections as those provided in other asset classes, such as the operational transparency requirements for Alternative Trading Systems (“ATSs”) that trade NMS securities and which the SEC has recently proposed be extended to ATSs that trade Treasuries and agency securities; and
• expanding markup and markdown disclosures (which refer to the difference between the price for the bond charged to the customer, and the price the dealer paid for that bond) to require the disclosures be provided in advance of a transaction, instead of just on the confirmation of the trade.

Options Markets

Ms. Crenshaw stated that the options markets “still have a long way to go” and that in comparison to the equity markets, they have less liquidity, wider spreads and higher fees, and more “pervasive” conflicts of interest. To address these concerns, she urged:

• applying similar requirements under the proposed Order Competition Rule to existing price improvement auctions within the options market, such as by removing (i) the guaranteed participation rights and (ii) auto-match requirements in order to encourage market participants to bid more aggressively;
• implementing similar executing quality measures applied to equity markets under the Rule 605 for entities in the options markets, such as monthly disclosures or standardized information for investors on (i) what happens to their order after it is submitted for execution and (ii) cross-venue price comparisons;
• revisiting a previous SEC proposal to impose cap transaction fees on option exchanges and prohibit fee discrimination to provide options market investors with similar protections as those in the equity markets; and
• revisiting the options qualifications framework in light of their risks, including the recent “frustration and confusion surrounding the exercise of put options” on Silicon Valley Bank and Signature Bank stocks after trading was halted for investors.