The coming year will see regulatory issues once again dominate discussions in institutional trading, although the focus will be less on compliance and more on what regulations ultimately will look like.
Among the themes:
- The direction on trading the Securities and Exchange Commission will take with new leadership;
- Changes in the Dodd-Frank Wall Street Reform and Consumer Protection Act that could mean a return in fixed-income trading to traditional market making; and
- The possibility of less equivalence in U.S. and foreign regulations, such as the European Commission's Markets in Financial Instruments Directive II, slated to take effect in 2018.
“What these changes will mean for broader market structure oversight are still to be seen,” said Ryan Larson, head of U.S. equity trading at RBC Global Asset Management (U.S.) Inc., Chicago. The impending departure of SEC Chairwoman Mary Jo White and the agency's Director of Trading and Markets Stephen Luparello “will most definitely be a game-changer in 2017,” he said.
One focus of the SEC in 2017 will be what it does with recommendations made by its Equity Market Structure Advisory Committee, a panel of representatives from brokerages, exchanges and money managers that was set to complete its work in February but has been extended to work until August of next year, Mr. Larson said.
“The ability for market participants to play an active role in the dialogue about market structure and, alongside regulators, to come up with meaningful market-driven solutions to the challenges that still exist and what market structure will look like in the future, will be paramount and shouldn't be lost on any new chair, commission or even presidential administration,” he said.
One recommendation expected to come from the advisory committee will be action on exchange access, or maker-taker, fees in which brokers receive a rebate for trading on certain exchanges, said Joseph Saluzzi, partner, co-founder and co-head of equity trading, Themis Trading LLC, Chatham Township, N.J. “The maker-taker pilot will be done,” Mr. Saluzzi said. “That's something that has energy from all sectors of the market ... I expect there to be a proposal for a pilot from the SEC within six months.”
Another SEC initiative, its tick-size pilot program for small-cap stocks that began its two-year test in October, should show benefits in the coming year, Messrs. Larson and Saluzzi said.
“While still in its infancy, very early results suggest that spreads have definitely widened; we've observed a significant increase in quoted size at the (national best bid and offer), yet we have also observed no notable change in overall trading volumes for the pilot,” Mr. Larson said. “Still, this pilot is very important, especially if it does indeed improve liquidity and not volume in smaller-cap stock, but more so in the concept that regulators and participants are no longer willing to accept a one-size-fits-all approach to market structure.”
Added Mr. Saluzzi, “So far all the early signs are good. Anecdotally, there has been an increase in the number of small-cap quotes, and spreads have not reasonably widened. We're seeing good stuff. We're just waiting for the SEC to disclose regular reports.”