On March 8, US Securities and Exchange Commission chairman Jay Clayton and director, Division of Trading and Markets Brett Redfearn gave a speech entitled “Equity Market Structure 2019: Looking Back & Moving Forward.” Chairman Clayton, who noted that their comments were their own and not necessarily those of the SEC or its staff, opined that a reassessment of Regulation NMS was needed. Regulation NMS was adopted in 2005 and has remained largely untouched since its adoption, despite substantial transformation of the US equity markets as the result of technology advances. Chairman Clayton stated his view of Regulation NMS as follows: “[T]here are 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.”

Chairman Clayton remarked that many market participants have raised concerns about the sufficiency of the consolidated public data feeds distributed pursuant to national market system plans operated by the exchanges and the Financial Industry Regulatory Authority (core data), as contrasted with the proprietary data products and access services available in the market place (which are typically faster, more content rich and costlier than core data). Chairman Clayton stated: “I believe we should explore whether core data needs to be upgraded to better meet the needs of investors and market participants in today’s modern markets … Accordingly, I have asked staff in our Division of Trading and Markets to develop recommendations that would consider the concerns raised about core data and the potentially underlying causes that were highlighted” during public roundtables on this subject.

Director Redfearn indicated that staff intends to explore several key areas related to core data, including speed, content (odd lots), order protection/best execution, depth, governance, transparency, and fair and efficient access.

Another particular area of concern is the application of Regulation NMS to thinly traded securities. Regulation NMS mandates a single market structure for all exchange-listed stocks, regardless of whether they are actively or thinly traded. According to chairman Clayton, the lack of liquidity in the stocks of smaller companies negatively impacts investors and the issuers themselves. One potential initiative noted by chairman Clayton would be to “allow issuers of thinly traded securities to suspend unlisted trading privileges for non-listing exchanges, while continuing to allow off-exchange trading in these securities as a means to maintain competition among trading venues.” Director Redfearn indicated that Division of Trading and Markets staff is considering whether to recommend that the SEC publish a policy statement regarding this issue and also whether exemptive relief from Regulation NMS is needed.

Chairman Clayton and director Redfearn also addressed regulatory approaches to combating retail fraud, including, potentially, amendments to Exchange Act Rule 15c2-11 (which governs the submission and publication of quotations by brokers and dealers for over the counter equity securities) and Exchange Act Rule 15g-9 (sales practice requirements relating to penny stocks).

The full text of the speech is available here.