EMSAC Considers Recommendations on Trading and Disclosure

The SEC Equity Market Structure Advisory Committee (“EMSAC”) considered recommendations made by a subcommittee that examined investor disclosures, trading halts and trading reopenings.

The EMSAC Market Quality Subcommittee made a number of recommendations regarding halts and reopenings in individual stocks and in the market generally. The subcommittee recommended that the exchanges make every possible effort to open all stocks at 9:30 a.m. following a trading halt. The subcommittee noted problems with reopening less liquid securities.

The EMSAC Customer Issues Subcommittee suggested that the SEC:

  • benchmark and monitor investor confidence in U.S. equities market structure by testing the clarity of disclosures on a representative sample of individual investors; and
  • modify Regulation NMS to require that meaningful execution quality and order-handling disclosures be provided to retail investors.

In a public statement at the meeting, SEC Commissioner Michael S. Piwowar stated that he had “previously challenged the notion that the [SEC] should ‘promote investor confidence,’ because it is not part of [the SEC’s] core mission and is a nebulous concept.” However, Commissioner Piwowar affirmed that he “completely agree[d]” with the Customer Issues Subcommittee’s proposal concerning investor testing, “not because it could improve investor confidence, but because it could facilitate investors making informed choices about investment venues, strategies, and products.”

Lofchie Comment: The recommendations offer a lot to consider about the ways that markets function and investor disclosure works. Trading firms should review the various statements carefully regarding the proposed procedures for stopping and restarting trading generally and in individual stocks. The customer disclosure issues might not be controversial in substance, but firms should consider whether the requirements concerning those issues will be difficult operationally.

As a matter of regulatory philosophy, the distinction made by Commissioner Piwowar between boosting investors’ confidence and increasing their “understanding” (which he described as “skepticism”) is important. Given the variety of forces that affect it, market behavior is innately incomprehensible, and attempts to control those forces can backfire or have unintended consequences. For that reason, the government’s effort to control market behavior in order to inspire investor confidence is a losing game. To play that game is to instill false confidence in investors, and that confidence will be shaken doubly when it is disappointed. As in love, so in the marketplace: It is better to know that things can go wrong than to have one’s overconfidence encouraged.



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