United States: SEC EMSAC Reviews Recommendations Concerning An Access Fee Pilot Program And Trading Venue Rules

Last Updated: April 29 2016
Article by Cadwalader, Wickersham & Taft LLP

Most Read Contributor in United States, September 2017

The SEC Equity Market Structure Advisory Committee (the "Committee") reviewed recommendations and updates from the subcommittees on Regulation NMS, Trading Venues Regulation, market quality and customer issues.

Regulation NMS subcommittee: The Regulation NMS subcommittee recommended a framework and data generation for an access fee pilot program (the "Pilot") that would reduce the access fee cap (and corresponding liquidity rebates) that national securities exchanges are permitted to charge (or pay) users, and measure the commensurate impact on both market quality and marketplace behavior. Specifically, the Pilot would measure the impact of lower access fees on (i) liquidity provisioning (e.g., bid/ask spreads, market depth, order-routing behaviors, the ratio of hidden liquidity vs. displayed liquidity on the exchanges, quoting behavior, and the average time before getting a fill, and (ii) liquidity taking (e.g., the ratio of on vs. off exchange trading, order-routing behaviors, price impact, slippage/realized spread and trade volume).

The proposed Pilot would include varying levels of "access fee caps" broken into four separate "buckets": (a) Bucket 1 – control bucket (which would represent the current $.003 access fee cap), (b) Bucket 2 – $.002 access fee cap, (c) Bucket 3 – $.001 access fee cap and (d) Bucket 4 – $.0002 access fee cap. The last access fee cap is intended to represent a de minimis economic incentive. The Regulation NMS subcommittee also recommended that the SEC ask specifically in any future proposal whether the access fee caps should be applied to alternative trading systems.

Trading Venues Regulation subcommittee: The Trading Venues Regulation subcommittee made several recommendations that were intended to "formalize and make more transparent the appropriate interactions between trading venues and other market participants and . . . further address potential conflicts and tensions." The recommendations included (i) increasing SRO rule-based liability levels and applying them consistently across SROs, (b) linking the compliance dates of those rule changes that require additional technology changes by the industry to the publication of guidance on implementation (e.g., Technical Specifications or FAQs) and (c) more centralization of common regulatory functions across SROs when such centralization can decrease the likelihood of duplications of effort or result in regulatory activity being handled more effectively.

Market Quality subcommittee: The Market Quality subcommittee presented its updated review of (i) how the U.S. equity markets operated during the period of volatility on August 24, 2015, (ii) the performance of the Limit-up/Limit-down Plan (i.e., the single stock circuit breaker), (iii) the current construct of the market-wide circuit breaker and (iv) issues surrounding the timing of market openings.

Customer Issues subcommittee: The Customer Issues subcommittee presented a range of potential enhancements to current rules that require the disclosure of execution quality and routing information, with a particular focus on enhancements that educate and address the concerns of retail investors.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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