Simply put, the SEC’s proposed changes to the National Market System introduce risk to the U.S. equities market that is already the envy of the world.
With all the debate about equity market structure, including market data, one might think our markets are a mess. That couldn’t be further from the truth. The performance and quality of the U.S. equity markets are exemplary and have steadily improved over the years – to investors’ benefit. Bid-ask spreads are tighter; stock prices are more efficient; execution speeds are faster; execution quality is up; trading costs are down; and, surveillance is more sophisticated. As an exclamation point, the equity markets have functioned remarkably well during the historical volumes, volatility, and stresses of the COVID-19 pandemic.
Given the current market conditions, now is not the time to introduce unnecessary risk to U.S. markets in what the SEC describes as a “Market Data Infrastructure” proposal. We must take the time to better understand impacts, debate the various changes, and take a data-driven approach to future proposals.
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Create Multiple SIPs
The Commission proposes to replace the two Securities Information Processors (SIPs) in operation today (one for the UTP Plan and one for the CTA Plan) with an estimated twelve “competing consolidators” upon full implementation of the proposal. These competing consolidators would be supplemented by “self-aggregators,” which would generate consolidated market data for their own accounts or to execute customer transactions, but would not be authorized to distribute data externally.
Eliminate the Unified NBBO
Substitute a National Best Bid and Offer (NBBO) from a single processor with the potential for NBBOs from multiple processors. The NBBO is the best bid and best offer for an NMS security that is calculated and disseminated on a current and continuous basis by the two SIPs currently in operation (which each distribute NBBOs for different “tapes”). The proposal is to replace a single NBBO with localized NBBOs, defined as the best bid and best offer that is calculated and disseminated on a current and continuing basis by a competing consolidator or calculated by a self-aggregator.
Expand “Core” Data
Today, “core” data is the price, size and exchange of the last sale and the national best bid and offer. The SEC proposes to add depth of book data (aggregated quotes at each price between the best bid and offer and the protected bid and offer, as well as five price levels beyond the protected bid and offer), plus single-market auction data and certain regulatory and administrative data.
Create “Round Lots” of Fewer Than 100 Shares
The Commission proposes to introduce a tiered definition of “round lot” that would reduce the number of shares required to constitute a round lot for stocks selling at more than $50 per share to less than 100 shares, depending on the price of the stock.
Require Order Display Without Protection
The Commission proposes to modify order protection and locked and crossed markets rules so that they do not apply to round-lots of under 100 shares. The Order Protection Rule requires trading centers to have policies and procedures in place reasonably designed to prevent trade throughs of protected bids or protected offers in round lots of NMS stocks—and rules designed to avoid the display of quotations that lock or cross any protected quotation in an NMS stock.
Reg NMS II Insights
The [SEC's] proposed rules are designed to create additional new infrastructure, which will likely have unintended as well as intended consequences. In that sense its looks a lot like a U.S. version of MiFID-II.Nasdaq Chief Economist EXPLORE PHIL'S INSIGHTS
Breaking Down the Proposals
Competing Consolidators v. UTP/CTA Processors v. Distributed SIP
The Voting Structure of Equity NMS Plans
Nasdaq has put together several proposals, aiming to move markets forward. We believe these proposals provide better paths toward enhancing our markets.
Our Proposal to Improve U.S. Equities Trading
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