Regulator Joins Nasdaq Chief in Warning About Too Many Tests

  • SEC's Luparello cautions against running too many market tests
  • Nasdaq's Greifeld promotes simulations, not real-world pilots

Experiments testing changes to the plumbing of the U.S. stock market could clog it up instead, according to a regulator and exchange executive.

A pilot program to examine ways of boosting volume for small stocks begins later this year, and a proposal for an experiment with maker-taker -- the system exchanges use to incentivize traders -- is likely to start taking shape later this month. With these tests in the pipeline, Steve Luparello of the U.S. Securities and Exchange Commission cautioned that there’s a risk of overdoing it on experiments.

“There’s the possibility of pilot fatigue,” Luparello, the director of the SEC’s Division of Trading and Markets, said Tuesday at a Securities Industry and Financial Markets Association conference in New York. “You can’t have that many pilots running at the same time.”

The trial programs have earned criticism for taking years to implement, and requiring brokers to make changes to their systems that may not end up being permanent. The so-called “tick-size pilot,” scheduled to take effect in October, will test ways to drum up more trading in small companies.

A group of industry advisers is also likely to propose a test of maker-taker at a meeting on April 26, David Shillman, the associate director of Luparello’s department, said last week. Under the sometimes-criticized practice, some exchanges charge traders who place orders and pay those who supply liquidity.

Luparello’s remark echoed comments from Jamil Nazarali, head of execution services at Citadel Securities, and Nasdaq Inc. Chief Executive Officer Robert Greifeld.

Greifeld suggested that regulators should use data and simulations to test changes, instead of pilot programs.

“I don’t see pilots as a gold standard,” Greifeld said at the Sifma event. “An analytical approach would be better than a pilot.”

(An earlier version of this story was corrected to fix Luparello’s title.)

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