The United States government is making sure regulatory agencies such as the Financial Industry Regulatory Authority (FINRA) and the Securities and Exchange Commission (SEC) are keeping pace with the US Equity markets, which are vastly and quickly changing due to the effects of technological innovation on market structure. Technology changes have always been first and foremost on regulators’ minds. During a senate banking hearing last week, the SEC relayed that it had stepped up its pace considerably in the way of technological innovation. Ever since May 6th, 2010, when trillions of dollars were quickly wiped out because of faulty algorithms, the market has changed significantly in order to rebound from algorithm-driven spoofing. Nowadays, according to numbers compiled by RBC Capital Markets and cited at the banking hearing, today’s fee schedules represent a highly fragmented market structure and many exchange business models are trying to counter some of the trends emphasized in that report.
When it comes to equities, there are many types of liquidity qualities in the stock market, depending on common trade flow metrics, including the needs of clients, the underlying securities and other variables, that when combined, result in the need for an equally high number of diverse trading choices for participants. Along with that, there are nearly 133 different order types across US market venues. These different trading needs of high and low-frequency trading operations brought about the growth of Alternative Trading Systems (ATS) and dark pools, yet got away from traditional systems such as National Market Systems (NMS). The SEC wants to test a ban for six months on eliminating rebates for a number of securities and participants, to study the effect it will have on the market.
During the Senate hearing last Thursday, under the committee on Banking, Housing and Urban Affairs, through its subcommittee on Securities, Insurance and Investments, a meeting titled “Regulatory Reforms to Improve Equity Market Structure” was held. The discussions covered topics such as defining Consolidated Audit Trail (CAT) market maker models, advisor misconduct and other areas of concern. The SEC also proposed a rule that would aim to amend the Securities Exchange Act of 1934, among other things.
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