The U.S. Securities and Exchange Commission is renewing its focus on market structure even as it works on rules to comply with the Dodd-Frank Act, said Robert Cook, director of the agency’s division of trading and markets.
The SEC will focus on “preserving advantages of the market structure while we address any potential flaws,” Cook said at a Security Traders Association conference in Washington. He said the May 6 plunge “brought a whole new dimension to the discussion” that was already under way.
While the SEC introduced short-term remedies to address problems exposed on May 6, the agency is now considering the role of liquidity providers in the current market in which high- frequency trading accounts for more than half of equities volume. A joint report by the SEC and Commodity Futures Trading Commission about the May 6 plunge that briefly erased $862 billion in value found that some firms providing bids and offers to investors reined in their activity, exacerbating a “liquidity mismatch” between buyers and sellers.
“What obligations should they have?” Cook said. “What obligations should they not have?” The SEC is also examining the ratio of order cancellations to trades and other issues related to market data, he said.
The renewed focus on rules guiding equities trading comes as the SEC and Commodity Futures Trading Commission are analyzing over-the-counter markets and beginning the rulemaking process for swaps. The Dodd-Frank Act was signed into law in July. An updated report on the May 6 plunge is due to be released this month.
The Financial Industry Regulatory Authority, which oversees almost 4,700 brokers and conducts surveillance for most stock exchanges, is focused on “regulatory fragmentation,” said Thomas Gira, executive vice president for market regulation at the agency.
There currently isn’t enough consistency in the amount of data regulators get from different market centers, Gira said. Some of the rules mandating the collection of data were written before new exchanges developed and haven’t been updated.
“Consistent audit trail across all the markets is absolutely the right way to go,” Gira said. He added that while the SEC’s proposal to create a trail that collects all information related to orders and trades would help regulators examine trading behavior, there’s a “robust debate about whether real-time is the right way to do it.”
Regulators must also focus on discrepant rules and trading protocols on markets that could increase “liquidity gaps like on May 6,” Gira said. While circuit breakers on individual securities, introduced in July, could help prevent sudden plunges in stock prices, they’re responses to a “symptom” of a problem instead of the cause.
“We don’t necessarily want to over-fix things” because new rules can have unintended consequences, Gira said. “We need to do a better job at identifying those on the front end than we’ve done in the past.”
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