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Regulation

SEC to reassess exchange practices and other market structure issues, officials say

SEC Chairman Jay Clayton

The SEC will spend 2019 reviewing equity market structure rules and practices to see if they can be improved to protect investors and market participants, Chairman Jay Clayton said at a Fordham University panel.

Speaking at the March 8 event, Mr. Clayton said he has asked division of trading and markets staff to review core market data and market access to address concerns raised in last year's market round table that the rules have created a two-tiered system in U.S. equity markets. Mr. Clayton expects that "among other things, these recommendations will look to update and upgrade the content and infrastructure of core data," he said.

Speaking at the same forum, Brett Redfearn, trading and markets division director, said the staff will assess "whether access to markets remains fair and not unreasonably discriminatory." In considering modifications to core data to ensure best execution, Mr. Redfearn said his staff will focus on speed, odd lots, order protection and best execution, depth-of-book liquidity, governance, transparency, and fair and efficient access.

In a challenge to current exchange pricing practices, Mr. Redfearn noted that Regulation NMS was adopted to avoid exchanges charging what amounts to mandatory fees to increase their revenues, "particularly those with dominant market shares whose information is most vital for investors. Today, we must assess the extent to which we may have ended up with the very result the commission hoped to avoid in 2005," he said.

The SEC will also review market quality issues concerning thinly traded securities and retail fraud, the SEC officials said. Since Regulation NMS mandates a single market structure regardless of trade volume, SEC staff will consider having primary listing exchanges develop pilot programs to explore the effects of restricting unlisted trading privileges for certain classes of thinly traded stocks.

To address retail fraud, SEC staff "are actively reviewing disclosure rules and registration rules," said Mr. Clayton, who stressed the need to consider updating Regulation NMS, "as well as our understanding of best execution in today's marketplace," he said. When Regulation NMS was adopted in 2005 to improve fairness in price execution and access to market data, there were "many areas that the commission got right, some that may have missed their mark and some that were positive in 2005 but may no longer be so," he said at the forum.

Lev Bagramian, senior securities policy adviser with watchdog group Better Markets, welcomed the news. "Increasing transparency to energize free market principles is good," he said. "There are some SEC rules that need upgrading and modernization. Coordination with other regulators is also going to be important."

Mr. Bagramian said he was encouraged by the robust engagement on market issues by SEC commissioners and staff recently, including last year's round table. "They care about the right stuff and they have done it in a thoughtful way," he said.