Since SEC Chairman Jay Clayton and Division of Trading & Markets Director Brett Redfearn took over last year, the SEC has been doing a tremendous amount of market structure work. While the tick size pilot and the proposed access fee pilot have received a lot of attention, there are other pilots that the SEC is reviewing. Earlier this year at an STA event in Chicago, Brett Redfearn said that there are currently 17 pilots being run out of the Division of Trading and Markets. He noted that there are differences in pilots:
“Some of the pilots are specific to an individual exchange. Many, including Limit Up Limit Down, the Tick Pilot or the Options Penny Pilot, are important forays into new policy areas for the market as a whole where there is generally a lack of sufficient data to enable an empirically based determination of policy. When important policy issues are on the table, many individuals might think they know the best possible policy outcome based upon their expertise or expertise, however, there often simply is not ample data to persuasively support one policy approach over another.”
While Mr. Redfearn clearly understands the benefits of pilots, he also said he would be reviewing the pilots that the SEC has previously authorized. Last week, the SEC made good on his promise and instituted proceedings to determine if Cboe’s BYX Exchange should be allowed to make permanent a Retail Price Improvement (RPI) pilot that they instituted in 2012. The RPI pilot was implemented by BATS in January 2013 and was allowed to be extended five times by the SEC.
The RPI pilot was sold as a way for retail investors to get price improvement on their orders:
“Under the Program, a new class of market participants called Retail Member Organizations (“RMOs”) would be eligible to submit certain retail order flow (“Retail Orders”) to the Exchange. All Exchange Users would be permitted to provide potential price improvement for Retail Orders in the form of non-displayed interest that is better than the national best bid that is a Protected Quotation (“Protected NBB”) or the national best offer that is a Protected Quotation (“Protected NBO,” and together with the Protected NBB, the “Protected NBBO”) called a Retail Price Improvement Order (“RPI Order”). When an RPI Order priced at least $0.001 better than the Protected Bid or Protected Offer for a particular security is available in the System, the Exchange would disseminate an identifier, known as the Retail Liquidity Identifier, indicating that such interest exists. A Retail Order would interact, to the extent possible, with available contra-side RPI Orders.”
The “retail liquidity identifier” that Cboe has been publishing for the past six years has been disseminating information about retail order flow to Cboe subscribers who purchase their proprietary data feeds. Remember how we always say it’s not just the speed but the content that makes data feeds valuable, well this is one of those valuable content pieces.
In a blog post from November 2012, we questioned why the SEC had approved an order type pilot which allowed an exchange to segment clients and fragment the market:
“The bottom line here is that the SEC is continuing to approve programs that are fragmenting the market even further…They are doing the exact opposite of what they should be doing which is to aggregate liquidity rather than to continue to fragment liquidity.”
Our words for the SEC were harsh at the time but we felt the Commission was allowing exchanges to get away with harmful market behavior. However, under Chairman Clayton, the SEC now seems to be taking a closer look at some outstanding items. In a stinging rebuttal to the Cboe request to make the RPI permanent, the SEC questioned the results of the RPI:
“The Commission questions whether the information and analysis provided by the Exchange support the Exchange’s conclusions that the Program has achieved its goals, including whether the Program has not had a significant impact on broader market quality. The Commission seeks additional information and analysis concerning the Program’s impact on the broader market; for example, additional information to support the view that the Program has not had a material adverse impact on market quality.”
Looks like the days of extending pilots, without proof that the pilot has helped the broader market, are over.