The head of Wall Street's top regulator has called for a review of a set of market reforms that ushered in a new era of trading in the U.S.
Known as Regulation National Market System, or Reg NMS, the 2005 reforms were designed to enhance competition between trading venues and to update the market's rules as trading became increasingly driven by computers and algorithms. As Reg NMS has aged, though, some of Wall Street's biggest exchanges, banks and broker/dealers have come to question the influence that the 14-year-old rule package carries in today's technology-driven U.S. stock market.
Now, SEC Chairman Jay Clayton said the agency "may have missed their mark" with some parts of the rule, while adding that other portions of Reg NMS may have become irrelevant in the nearly decade and a half since its introduction.
"As technology and business practices evolve, so must our regulatory framework," Clayton, who joined the SEC in 2017 after being nominated by President Donald Trump, said during a March 8 speech at Fordham University. "It is clear that the market challenges we faced in the early 2000s are not the same as the issues that we confront over a decade later."
Speaking alongside SEC Division of Trading & Markets Director Brett Redfearn, Clayton highlighted a series of measures the SEC would explore in 2019 related to the current U.S. equity market structure. The potential reforms were based on concerns raised by market participants at several roundtable events the regulator hosted in 2018.
Among those concerns were worries surrounding the consolidated tapes that U.S. stock exchanges help operate.
By and large, exchange operators such as Intercontinental Exchange Inc., Nasdaq Inc. and Cboe Global Markets Inc. offer two types of stock market data products to trading companies: proprietary and consolidated feeds. The exchanges' proprietary data feeds, which faced heavy scrutiny in 2018, are largely believed to be a necessity on Wall Street, as they tend to carry richer information and operate at faster speeds than the consolidated products.
The consolidated products, on the other hand, aggregate data provided by each exchange to create a unified feed. But many market participants have said that they can no longer rely on the consolidated feeds to ensure they get the best execution price possible for their customers because of their slower speeds and lacking data.
"We currently have a two-tiered system of market data and market access in the United States — core data and proprietary data," Redfearn said. "I believe we must assess whether the current core data system is contributing to a bifurcated landscape of market data that calls into question whether access to markets remains fair and not unreasonably discriminatory."
The SEC is also planning to tackle potential reforms that could calm some market participants' fears around illiquid small-cap stocks and fraudsters in the over-the-counter markets where most penny stocks trade.
To address the outstanding concerns about illiquidity in small-cap stocks, Clayton said he has asked the Division of Trading & Markets' staff to review the idea of a pilot program that would examine the impacts of allowing certain thinly traded stocks to trade exclusively on their primary listing exchange, thereby centralizing their trading activity onto one venue. Companies' stocks can currently trade on any exchange, no matter where they are listed.
The SEC will also be looking at potential revisions to the sales practices for penny stocks, which are generally considered securities issued by a smaller company that trade for less than $5 per share. The agency will also weigh making changes to the Exchange Act's definition of penny stocks, which Clayton said "seem to have a special gravitational pull for fraudsters looking to take advantage of retail investors hoping for outsized returns."
Any market structure reforms the SEC does pursue in 2019 will likely take months, if not years, to be fully enacted. But the recommendations mark the latest sign that the regulator's top brass is open to reconsidering past measures as the market continues to evolve.
"Some of the challenges we face today may, in fact, be consequences of Regulation NMS and other rules," Clayton said. "It is important that we reassess Regulation NMS, now 14 years old, as well as whether the dissemination of, and access to, market data can be improved to better facilitate Exchange Act objectives."