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Wall Street eyes final act of stock market reforms in 2020


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Wall Street eyes final act of stock market reforms in 2020

SNL Image
From order routing to exchange competition, the U.S. stock market's plumbing could see sweeping reforms in the new year.
Source: AP Photo

Some of Wall Street's most divisive trading feuds could come to a head in 2020.

Half a decade ago, Michael Lewis parachuted into the behind-the-scenes world of U.S. equity market structure with the publication of Flash Boys. The author described a world in which stock exchanges and speedy traders allegedly manipulated the market in their favor with little regard for mom-and-pop investors, a conclusion that many executives in the trading community still protest today.

The years since its release have seen a whirlwind of congressional hearings, tense industry conferences and insults exchanged through letters to the SEC, all centered around varying ideas of how to fix the U.S. stock market's plumbing.

Now, Wall Street and Washington appear to be on the verge of at least partially resolving some of the issues that were at the heart of those spats.

"If you think of this as a Shakespearean play, it feels like this year is going to be Act IV or V," Baird Head of Trading Jack Miller said in an interview. "We're going to see the capitulation of a number of themes that we've been working toward for a long time."

The SEC will first look to address broker/dealers' order routing disclosures in the new year, with enhanced requirements that will go into partial effect Jan. 1, 2020.

Known as Rule 606, the revamped mandate will force broker/dealers at their client's request to assemble a standardized report detailing how they route that investor's orders. Today, many broker/dealers already provide some, if not all, of that information. But they tend not to follow a uniform structure when doing so.

"It's not standardized, it's not clean, it's not backed by any sort of rule at this point, and it's not deeply available to everybody. That'll change," Miller said. "I do suspect there will be some reactions from the buy side as a result of this that will ultimately drive changes in behavior across the board."

Trading officials at the SEC are expected to roll out new reforms to U.S. stock exchanges' data businesses in 2020 as well.

The regulator's trading division is considering changes to the "transparency, infrastructure and governance" of how the Intercontinental Exchange Inc.-owned New York Stock Exchange, Nasdaq Inc. and Cboe Global Markets Inc. package and sell trading data to the rest of Wall Street, according to the SEC's latest rulemaking agenda.

Market data has been a hot-button issue for years. Broker/dealers, big banks and even one stock exchange owner, IEX Group Inc., have been clamoring for the SEC to take a closer look at exchanges' data businesses for some time, saying the bourses charge unreasonably high prices for those products. The exchanges have argued their data businesses are subject to competitive forces that justify their pricing models.

"No matter what the SEC does, someone will always be unhappy," Jim Nevotti, president of technology provider Sterling Trading Tech, said in an interview.

But those parties have found some common ground recently related to the U.S. consolidated data feeds, which aggregate information from each exchange to create a product that gives users a high-level overview of trading activity. The exchange groups in charge of those feeds recently proposed including information about smaller-sized trades, a move many brokerage executives have said would mark a step in the right direction.

"It's time for the regulatory landscape around market data to meet the technological landscape where it is today," Joe Wald, the founder and CEO of algorithmic trading software company Clearpool Group Inc., said in an interview.

Exchanges, brokers and other constituents on Wall Street will likely see other landscape-shifting moves in 2020. That includes the expected launches of three new stock exchanges in Long-Term Stock Exchange Inc., Miami International Holdings Inc. and the Members Exchange; potential changes to a highly anticipated trading database known as the Consolidated Audit Trail; and the private markets becoming more widely accessible to investors.

All those changes would carry broader implications for the new year and beyond.

Market participants have notably started to question how these changes will influence what it means for a broker to achieve best execution on behalf of their client, and whether the Order Protection Rule, a 15-year-old reform that requires that traders never execute a client order at a price worse than what is available on a U.S. stock exchange, needs to be revised.

Jay Clayton, the top official at Wall Street's top securities regulator, has signaled an interest in doing just that.

"It's time," the SEC chairman said at an industry conference in November. "Our markets have changed since we put the rules in place, and we should be looking at them."

SNL Image
Among other reforms, the SEC is expected to take a close look at rolling out new rules around U.S. stock exchanges' data businesses in 2020.
Source: AP Photo