SEC Officials Provide Update on Equity Market Structure Modernization

SEC Chair Jay Clayton and the SEC Division of Trading and Markets Director Brett Redfearn reviewed agency efforts to improve equity market structure and the rules governing the National Market System (the "NMS").

Equity Market Structure Modernization

At an SEC-sponsored virtual forum, Mr. Clayton and Mr. Redfearn described the current state of equity market structure modernization and highlighted certain progress.

On issues concerning thinly traded securities, Mr. Clayton criticized the "one-sized-fits-all" approach for exchange-listed stocks. Mr. Redfearn highlighted proposals (i) to provide incentives for heightened obligations taken on by market makers, (ii) to conduct periodic intraday auctions as a method for concentrating liquidity, and (iii) to implement non-automated markets to promote participation.

On retail fraud, Mr. Clayton commended proposed amendments to SEA Rule 15c2-11 ("Initiation or resumption of quotations without specific information") designed to increase the availability of issuer information. He also described concerns regarding the current rule's "piggyback" exception, which allows quoting in OTC securities when there is a lack of publicly available information (see previous coverage). Mr. Redfearn added that the proposed amendments would reduce regulatory burdens for broker-dealers, who are "less susceptible" to fraud and manipulation when quoting OTC securities.

Mr. Clayton called market data "fundamental" in order to achieve transparency and price discovery within the secondary equity markets. He noted the use of proprietary data products in order to supply more in-depth data.

Mr. Redfearn described additional efforts on NMS modernization:

• NMS Plan Fee Changes. Mr. Redfearn anticipated a staff recommendation for the SEC to rescind a provision under Regulation NMS Rule 608 allowing fee changes to be effective immediately upon filing with the SEC.

• NMS Plans for Equity Data Oversight. Mr. Redfearn identified deficiencies concerning market data, including a conflict of interest for exchanges that offer "competing proprietary data products."

• NMS Market Data Infrastructure. Mr. Redfearn highlighted a proposal to (i) improve pre-trade transparency for higher-priced securities, (ii) provide depth-of-book price levels and (iii) offer information that allows participation in exchange auctions. He applauded the proposal for aiming to "greatly expand" the content of such data available.

SEC Transaction Fee Pilot Ruling

Mr. Clayton and Mr. Redfearn weighed in on the recent D.C. Circuit Court decision vacating the SEC's transaction fee pilot (see previous coverage), which was adopted as part of the agency's plan to support market-driven analysis in its rulemakings.

Mr. Clayton asserted that the decision "narrowly focused" on a procedural issue. He said that the SEC now has the obligation to suspend exchanges' fee filings unless the fee is found reasonable on a basis other than in accordance with the Exchange Act.

Mr. Redfearn underscored the elements of market fee rules, SEA Section 6 ("National securities exchanges"). These include that (1) exchanges establish reasonable fees; (2) fees are distributed equally across an exchange's facilities; and (3) fees create no undue burden or competition.

Other Issues

Mr. Clayton also noted a recent interagency memorandum of understanding between the SEC and the DOJ Antitrust Division aimed at enhancing antitrust enforcement.