The planned reform of stock markets will intensify

By Jeffrey O’Connor, Head of Market Structure, Americas, at Liquidnet

Many will be eager to turn the page in 2022 in what was one of the worst stock performances in many years. Unless of course you fall into the category of some quantitative fund that has played factor trades right, in general, across a broad rating of advisors/money managers/funds, overall performance has been poor. Violent correlations make stock picking very difficult, and subsequent collective risk/raising behavior drives real, actionable institutional liquidity out of the market.. These are some of the topics to touch upon when reviewing 2022, and for much of the year, the provision of liquidity, or lack thereof, was the more substantive story about market structure — that is, even the involvement of regulators.

In perhaps the largest proposed stock market reform since the implementation of the Reg NMS in 2005, mid-December brought formal proposals to the Securities and Exchange Commission to enhance transparency and competition in the US stock market. Specific proposals are:

  1. Exchange/Auction Based Retail Structure (Demand Competition Rule)
  2. Lower price increases lower
  3. Reduced exchange access fees
  4. Wide dissemination of single payment data and inclusion of National Bank of Oman
  5. Industrial Central Data Bank to provide deeper data and better execution through existing 605/606 base data

After former SEC Chairman Jay Clayton spent four years bent on deregulation, bringing broker/dealers into the market structure table after years of non-inclusion on demand from exchanges and a high-frequency trading structure – this business has thrived through much of the decade. Previous. In the shadow of our time, new president Gary Gensler has been coming in with a gritty resolve to reorganize – Some refer to political motives in this hadeeth.

The buzz of activity surrounding early 2021 created a host of unexpected issues that needed to be addressed: trading app circumvention, settlement short calls, short selling security measures, crowd sourcing fallout, etc. Gensler’s primary goal – that is, to bring volumes back to the exchanges and, in the process, reduce what might be perceived as an uncompetitive wholesale market maker arena..

The retail lobby is strong, and the existing market structure system has created favorable conditions and access/liquidity for retailers – so much so that Gensler’s original intention to completely dismantle the PFOF system was thwarted. The mid-December proposal represented a flank attack. A retail trader currently enjoys commission-free trading, accessible markets, and unlimited volume in over 10,000 listed stocks and ETFs, at prices equal to or better than what institutions receive – bringing complexity and regulation to this backdrop will be a big fight..

While some initiatives have a very low probability of implementation given the burden/uncertainty of impact/intervention in markets/timing and ongoing legal – and currently working – etc., some proposals have a better chance of implementation, all of which aim to bring volume back to normal. exchange rate.

An overlay graph with other exchanges and ghosts can be useful. The shift in volume from exchange to OTC, and its viability, as a result of the pandemic is the largest shift in market structure since the Reg NMS.

It’s amazing to think that before the Reg NMS, it was pretty much a duopoly with the exchanges controlling the execution. Then it is equally surprising to see the explosive fragmentation of the markets in the wake of the NMS implementation. So while the exchanges’ market share is far behind in the early part of this century, the 10% drop in market share over the past three years is very noticeable — and doesn’t sit well with current management.. But it’s also notable for the stock’s outperformance since Gensler’s June announcement that the PFOF structure will remain the same, to the mid-December proposals. Price is always the news, but the flank attack seemed to be expected – twice as good as VIRT’s performance as the wholesaler’s representative.

Through 1,656 pages of new rules, no evidence was found that the PFOF system presents trade conflicts that harm retail investors. The data and analysis of the estimated $1.5 billion in savings for retail investors by way of guidance through the auction system appears hasty and opaque..

For the Reg NMS, implemented in August 2005, industry engagement began in the fall of 2002 with a series of roundtables on market structure and industry discussions. Then it was officially proposed in February 2004 and finally implemented after 1.5 years In a system that seems to work so well for a retail investor, why aren’t industry participants included? Why don’t these proposals contain data and analysis from both sides? In what appears to be the potential biggest change in market structure since the Reg NMS, why was he pushed to propose at such a small fraction of the time? And given the obstacles to getting to execution, and perhaps even exceeding the time this department calls the SEC headquarters, why announce things in such a drastic way?

This will be a very flexible position and will grab business headlines for the next few months, as it is technically in the comment period. The typical suspension period extends to six months – given the uncertainty and strong opposition from the industry, analysis and legal action will be extended further than usual. The wholesaler lobby has not yet officially commented, but remember that Virtu announced its intentions to sue the SEC in early December. Counter-analysis, from all angles, along with hostile banter, is about to start heating up, so stay tuned.

Leave a Reply

Your email address will not be published. Required fields are marked *