Market Participants Encourage SEC to Improve Equity Market Structure Rules

Market participants urged the SEC to improve the equity market structure rules in response to the market volatility of August 24, 2015. In a letter to SEC Chair Mary Jo White, the participants, including "asset managers, ETF providers, industry analysts, institutional and retail broker-dealers and professional market makers and liquidity providers," stated that the market remains susceptible to similar events that could occur at any time.

The letter cited factors that the market participants believe contributed to the August 24 events, including: (i) a lack of consistent limit-up/limit-down ("LULD") reopening procedures across exchanges, particularly with respect to price collars imposed by certain exchanges that are not consistent with LULD principles; and (ii) "clearly erroneous trade rules and procedures of exchanges which are not consistent with LULD."

The market participants recommended that the SEC promptly direct the exchanges to harmonize their LULD reopening procedures, subject to public comment and approval of the SEC, as follows:

• Securities should only reopen after taking appropriate steps to minimize or offset order imbalances;

• Price collars on openings and reopenings should not impede price discovery. Further, price collars should mirror existing LULD price bands (5% and 10% for Tier 1 and 2 securities). If imbalances cannot be offset within such price collars, auctions should be extended in predefined and uniform time increments and price collars should be expanded based on predefined thresholds until such time as order imbalances have been appropriately minimized or offset;

• Trading should not occur at any exchange or market center until the primary exchange has reopened the security and LULD bands have been disseminated and applied;

• Exchanges should be required to consolidate liquidity at the primary listing exchange during a LULD re-opening; and

• Order imbalance information should be disseminated across the markets during reopening auctions.

Participants also asked that the SEC harmonize their "clearly erroneous trade rules" with LULD as follows:

• Clearly erroneous trades are trades which occur outside LULD price bands and associated consistent reopening standards;

• Exchanges have the onus of proactively enforcing LULD bands and promptly cancelling trades that fall outside such bands; and

• To facilitate this consistency, LULD bands should not be doubled during the beginning and ending of the trading day.

The letter concluded by reiterating that "the improvements to the LULD structure discussed above reflect a consensus among most market participants and could be implemented relatively swiftly, but only through SEC action."