SEC Chair White Delivers Speech on Equity Market Structure (with Lofchie Comment)

SEC Chair Mary Jo White delivered a speech to the Security Traders Association's 80th Annual Market Structure Conference to review the status of equity market structure.

Chair White focused on three particular "fundamentals" in her review of equity market structure, including:

• technology and the operational integrity of the markets;
• the identification and testing of "assumptions" about market structure; and
• the need for more empirical evidence and data to inform decisions about the markets.

According to Chair White, there have been steps taken to address technology and operational integrity of the markets, such as the Market Access Rule and Regulation SCI; however, there are still areas needing improvement. She noted that she has asked the SEC, FINRA, and executives of the exchanges to work on developing "comprehensive action plans that address the standards necessary to establish highly resilient and robust systems for securities information processors."

Additionally, Chair White identified certain "assumptions" that she believes must be reconsidered to improve market structure, including the idea of a "one-size-fits-all" market structure, including the scope of NMS and the self-regulatory model.

Finally, Chair White spoke about the need for greater sources of data to better assess today's markets. Chair White described certain efforts the SEC has employed to improve empirical evidence, such as the market information and data analysis system, "MIDAS," the Large Trader Reporting Rule adopted in 2012, and the Consolidated Audit Trail Rule. She also announced a new website being launched by the SEC next week that is "designed to promote a fuller empirical understanding of the equity markets," and will allow users to explore key market metrics and trends based on aggregate analyses of MIDAS records over the last year. The site will also feature staff research papers and reviews based on a variety of data sources.

Lofchie Comment: Chairman White's speech was far-ranging; in some senses, so far ranging that it could be read to suggest numerous different directions: everything from doing away with the self-regulatory structure of exchanges, to rethinking Regulation NMS, to establishing a new market structure for small companies. On the issue of technology and the role of high speed trading, Chairman White strikes a generally positive note, but notes that the SEC is moving more aggressively to regulate the use of technology (with the implicit threat to bring disciplinary actions against firms whose technology fails). There seems some irony to me in this regard in that the use of technology by the government is likewise subject to failures, as demonstrated in the recent news as to the opening of the health care exchanges, and in less publicized failures at the SEC (and the CFTC as well). My concern in this regard is that government should not hold business to a standard of technology perfection that is impossible to meet either by business or government--some level of failures is inevitable--and it is not obvious that the appropriate response to a technology failure is either more rule making or the bringing of disciplinary actions. In short, co-operation in service of a common interest may be a better route than the threat of sanctions. On a separate note, Chairman White's speech contains some surprising statistics, particularly as to the decline in the number of companies that are listed on U.S. exchanges. According to her speech, this number has declined from over 8,000 in 1997 to about 4,900 today. That is a pretty shocking fall. Her delivery of this statistic in the context of a speech on market structure carries with it at least some implication that there is a material tie between market structure and the number of listed companies. While this may be true to some extent, it should raise questions as to whether the entire regulatory system is making the United States a less attractive business environment. That is certainly my strong and often-repeated view as to Dodd-Frank and I am aware that others have that view as to Sarbanes-Oxley (which is largely outside my personal expertise), which is a statute that is much more relevant to whether companies decide to publicly list their securities in the United States.

See: SEC Chair White's Speech, "Focusing on Fundamentals: The Path to Address Equity Market Structure".