It’s Time to End the One-Size-Fits-All U.S. Equities Market Structure: Let’s Give Issuers Flexibility
Would you like to see more liquidity in your stock and a greater ability for investors to get in and out of positions with minimal price disruption? What about seeing more transparency around trading? It’s been more than ten years since we had any major changes to market structure and we have the opportunity today to propose some meaningful changes that we think can help address these issues for the benefit of companies and investors. And Nasdaq-listed companies have the opportunity to play a key role in moving these initiatives forward.
Nasdaq recognizes that our equities markets are the best in the world. But we believe that market structure modernization can spur even greater economic vitality. We want small and medium companies to have the flexibility to trade in an environment that matches their unique profile and gives investors the confidence to invest in the future of these growing companies. We also believe in aiding small and medium growth companies by introducing intelligent tick sizes and through market maker liquidity incentives.
As a business executive, if you’ve had a situation where your company shares experienced unusually high volatility and a board member called to ask what was going on, could you answer? Without an aggregate view of liquidity, you may not have the insight to understand exactly what was happening. During the last decade or so, the U.S. equities market structure has evolved, moving away from single-exchange trading and toward greater fragmentation, which reduces visibility into trading.
Markets are more fragmented. Investors may not even be aware that when they place an order, it may go to one of 13 different exchanges or over 40 electronic networks or dark pools. When they find out, they’re often surprised and disconcerted by the market complexity. With trading dispersed across so many venues, each one has a very thin crust of liquidity for small and medium growth companies, a crust that can be broken by a single order. Investors may be unaware of the risks because they lack visibility into this disaggregated trading environment.
We believe that if issuers and investors could see the liquidity aggregated and displayed on a single exchange, it would instill greater confidence and produce better results. Nasdaq supports giving smaller issuers the choice to concentrate liquidity by reducing the number of exchanges authorized to trade them. This would allow liquidity to aggregate and display in a single place and maximize supply and demand. It would also simplify and facilitate a better understanding of trading.
We would also like to see these smaller companies have the choice to trade on whatever increment enhances liquidity as determined by the listing exchange. To this end, we are advocating for intelligent tick sizes. Flexible tick sizes—made possible with today’s technology—are better able to accommodate the different needs of different securities and facilitate quality trading.
Finallly, we advocate for a flexible rebate/fee structure for the trading community that could match the different needs of these new issuers, while creating a trading environment that would attract more investors. Nasdaq is committed to balancing the privileges and obligations for market makers in small and medium growth securities to help incentivize tight spreads and a high-quality trading environment for all participants in these less liquid stocks.
These are just a few of the areas where we’re focusing our efforts. We believe that these changes hold the greatest promise of creating more vigorous equities markets and, especially, provide a better trading environment for small and medium growth companies and their investors.
Learn more about our efforts to revitalize the U.S. equities markets on our Revitalize webpage.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.