Commissioner Luis Aguilar’s “US Equity Market Structure: Making our Markets Work Better For Investors”


SEC Commissioner Luis Aguilar has always been a friendly investor voice, and we are sad to see that he will be leaving the SEC after his 2nd term expires in June (he has served since 2008). To serve two terms that have included  the Financial Crisis and the Flash Crash (and their aftermaths) is no small feat, and he served the public admirably. He doesn’t leave us empty handed! This week, in advance of the SEC’s first Market Structure Advisory Meeting (on Rule 611), he released a fantastic document, which frames the debate around the design and functioning or our current equity market structure. Today we wish to highlight this document.

Titled Us Equity Market Structure: Making Our Markets Work Better For Investors, it is 15 pages long with no fewer than 184 well-researched footnotes. Please read it!

Commissioner Aguilar is no stranger to hitting hard on equity market structure topics.  You might recall that last year Commissioner Aguilar said the SEC should seriously consider implementing a pilot program that would temporarily ban maker-taker rebates​ .  In his new paper, Commissioner Aguilar again tackles this issue but also expands his thoughts to many other areas of equity market structure that he says require action.  We would like to highlight just a few of his topics:


But the burgeoning number of trading venues carries a number trade-offs, as well. First, the dilution of liquidity among multiple trading centers can impair market quality, in particular the price discovery process, which is one of the markets’ most critical functions. Second, multiple trading centers can give rise to added costs and complexity, and make our markets more susceptible to disruptions, whether technical or otherwise. Finally, multiple trading centers can lead to transparency issues for investors, who may struggle to identify the venues to which their orders were routed in an effort to secure the best price.”

Dark Trading:

We were glad to see that Commissioner Aguilar wants the Commission to address the trend of increased dark trading.  He recommended:

– the Commission should study how the use of non-displayed order types by exchanges may affect the price discovery process.

– the Commission should explore ways of exposing off-exchange trades to more competition.

Commissioner Aguilar then recommended something that Themis Trading has long been calling for:

“The Commission should dust off the Regulation of Non-Public Trading Interest proposal issued in 2009, and examine whether price discovery could also be enhanced by enacting the provisions proposed in that release. These provisions include: (i) requiring ATSs to publicly display smaller-sized actionable indications of interest,(ii) reducing the 5% volume threshold for ATSs to publicly display their best-priced orders, and (iii) requiring ATSs to disclose their identities when they report executed trades to the consolidated tape, with an appropriate exception or delay for block trades. These actions have already been subject to public notice and comment, and the Commission could proceed to adoption right away, subject to such improvements as may be warranted by the comments and data received.”

Maker Taker and Trade-At Pilot:

One option for the Commission to consider, as recommended by certain market participants and as proposed in a recent House bill, is a carefully constructed pilot program...Nasdaq’s experience earlier this year might suggest that any maker-taker pilot program should include a trade-at rule.

Given the uncertainty as to the potential impact of eliminating or reducing maker-taker fees, the proposed pilot program should have two phases. The first phase would eliminate or reduce rebates, with a corresponding reduction of the access fee cap. At that stage, the pilot would not include a trade-at requirement. At the end of the first phase, the Commission would evaluate whether the exchanges lost market share and, if so, to which venues. In the second phase of the program, the Commission could reevaluate the level of the access fee cap, and, if appropriate, include a trade-at restriction to encourage the posting of liquidity on exchanges. Importantly, the Commission should consider proceeding with the second phase of the program regardless of the results of the first.

We encourage you to read Commissioner Aguilar’s entire paper because it is a thoughtful piece which presents many sides of many issues in the market structure debate.  The Commissioner even gives a nod to Themis Trading in his paper:

“Our markets have variously been described as “broken, a “complete mess, or, perhaps most alarming of all, “rigged. What is especially troubling about these criticisms is that they come not from uninformed outsiders, but from sophisticated industry participants.

Thank you, Commissioner Aguilar. Thank you for such a useful document to frame the “holistic” debate we all are undertaking. And Thank you for your long service.