The New Democrat Coalition Enters The Market Structure Debate
Some more voices in DC are speaking up about market structure issues. This time a group of Democrats from the House, known as the New Democrat Coalition, has sent a letter to SEC Chair White expressing their market structure concerns. According to their website, the New Democrat Coalition (“NDC”) “is the pro-growth, fiscally-responsible wing of the Democratic Party” and “is a tech-savvy group of legislators who are tapped into the new economy.” The lead signature on the letter is from Rep. Bill Foster (D-Ill.) who also happens to be Congress’ only Ph.D. physicist.
We were quite surprised by the New Democrat Coalition’s sophisticated level of understanding of the modern equity markets. They have obviously done their homework and must be consulting with some industry participants.
The letter focuses on four areas of reform: additional order routing disclosure, more ATS transparency and disclosures, evaluation of access fees and more investment in the Securities Information Processor (SIP).
1) Additional order routing disclosure – the NDC wants the SEC to modernize and expand Rule 605 and 606 so investors can have more information when analyzing their trades for best execution. We agree with the NDC on this issue.
2) More ATS transparency and disclosures – the NDC wants ATS information standardized and expanded and supports the SEC’s efforts to introduce new disclose initiatives. Considering that 36% of the volume is traded off exchange (and 42% of that is from ATS’s), the NDC thinks investors need more information on how their orders are handled by ATS’s. We support the NDC’s call for more disclosure of ATS’s and would encourage the NDC to go further. We think they should call on the SEC to re-release their 2009 Proposal for Regulation of Non-Public Trading Interest.
3) Evaluation of access fees – the NDC wants the SEC to evaluate the impact of the 30 mil access fee cap as well as rebates (the maker taker model). They noted that a number of market participants have raised concerns that these payments are skewing order routing decisions and encouraging the creation of certain order types. We think the NDC should have went further here by supporting Rep. Lynch’s H.R. 1216 bill (the “Maker-Taker Conflict of Interest Reform Act of 2015″ ).
4) More investment in the SIP – the NDC realizes that the SIP will never be as fast as direct feeds but they are calling on the SEC to incentivize the exchanges to modernize the SIP. They want the operators of the SIP’s to minimize the latency differential as much as possible. We agree with the NDC on this issue as well.
The New Democrat Coalition’s letter was signed by eleven members of Congress which is very encouraging. It tells us that ours and others efforts to reform the equity markets over the last few years have not fallen on deaf ears. We hope these members of Congress continue to put pressure on the SEC to act quickly and make these sensible reforms.