SEC Commissioner Hester M. Peirce advocated for a more holistic retrospective review of equity markets regulation that focuses on the “assumptions underlying those rules” rather than the most recent adoptions.
At SIFMA’s market structure conference, Ms. Peirce encouraged regulators to address challenges in equity markets without accepting the current regulatory framework as a structure for all future reforms. Ms. Peirce explained that the regulators have focused on making “regulatory tweaks” to restrict market behavior instead of taking a holistic approach by questioning assumptions and the current regulatory status quo. As an example, Commissioner Peirce cited the Order Protection Rule, which, according to Ms. Peirce, has significantly impacted equity markets without sufficient justification. Additionally, Ms. Peirce argued that the rule “distorts” market behavior by (i) incentivizing broker-dealers to prioritize price in execution decisions above customer needs, (ii) increasing underlying issues of securities information processor feeds by expanding their importance, (iii) compelling brokers to subscribe to exchanges’ private data feeds as well as public tapes, and (iv) increasingly homogenizing trading facilities and exchanges. Ms. Peirce questioned whether the SEC should be exploring alternatives to the rule rather than continuing to offer up new regulatory tweaks that try to control the distorted behavior the rule itself creates.
Ms. Peirce advised regulators to consider:
- acknowledging that efforts to “micromanage” communications and trade between market participants have been demonstrably ineffective;
- eliminating burdensome market communication rules rather than proposing specific rules to remedy issues;
- revising statutory and regulatory requirements, which currently deter new entrants and reduce diversity within investor services; and
- favoring a more “agile” regulatory system for trading equities to address changing technology and investor needs, rather than a national market system.
Lofchie Comment: Regulation NMS was adopted over two dissents that were issued by SEC Commissioners Cynthia Glassman and Paul Atkins. The reasoning behind those dissents has been materially borne out. A reexamination of assumptions is in order.