SEC Division Director Responds to Volatility and Fragmentation Concerns in the U.S. Equity Markets

SEC Division of Trading and Markets (the "Division") Director Brett Redfearn described the agency's response to volatility and fragmentation concerns in the U.S. equity markets.

In a speech before the 2019 Annual Conference of the National Investor Relations Institute, Mr. Redfearn stated that technology, competition and regulatory changes, such as Regulation NMS, have led to increased speed and fragmentation in the equity markets. The SEC updated its rules in order to address these concerns by:

• approving new volatility moderators to lessen volatility in stressed market conditions;

• mitigating technology risk by requiring (i) broker-dealers to establish risk management tools and (ii) exchanges and large alternative trading systems to strengthen the controls in their automated systems;

• increasing the required operational transparency provided by broker-operated dark pools that trade listed stocks; and

• adopting greater disclosure requirements as to broker order-routing practices.

Mr. Redfearn said that the SEC plans to prioritize issues relating to the market for thinly traded securities, the transaction fee pilot, and market data and market access. To remedy the effects of market fragmentation, the Division is considering allowing only the primary listing market to trade certain securities.

Mr. Redfearn responded to criticism of the transaction fee pilot, which was designed to compile the necessary data to assess whether the exchange access fee rules are still serving their intended purpose. Mr. Redfearn expressed his support for the pilot, emphasizing the importance of the data that will be collected. However, Mr. Redfearn also reported that the SEC may choose to lower or eliminate the fee cap.

Mr. Redfearn also addressed concerns from investors and retail brokers about the cost of stock exchange data feeds. Mr. Redfearn highlighted the potential negative effects of the high fixed costs of proprietary data and access products, including the possibility of pushing smaller brokers and trading firms out of the market and, thus, increasing the concentration of trading activity. Mr. Redfearn expressed concern that the higher costs are causing brokers to provide limited top-of-book data to retail investors. He noted that SEC Chair Jay Clayton has instructed SEC staff to examine data cost issues.