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Dec 06, 2017

Sifma targets fees and transparency before Reg NMS overhaul

Group calls for the agency to focus on wrapping up key items on its agenda

The Securities Industry and Financial Markets Association (Sifma) has urged the SEC to get projects such as lowering exchange fees and boosting transparency in the equity markets out of the way so that it can focus on revamping landmark rules designed to improve trading.

Regulation National Market System (Reg NMS), which came into effect in 2005, was designed to modernize the regulatory framework for the US equity markets amid changing technology and diversification. It comprises four central measures, perhaps the most important of which is the order protection rule that requires trading centers to prevent the execution of trades at worse prices than protected quotes displayed elsewhere.

Reg NMS has been under review this year as part of the SEC’s practice of assessing measures it has implemented to see how they are performing. Some critics say it has helped give rise to a fragmented marketplace and high-frequency trading, which they say disadvantages retail investors.

As part of that review, Sifma earlier this year urged the SEC to consider a series of options to improve the functioning of the national market system (NMS) (, 4/4). In a recent letter to the commission, the industry group acknowledges that a full review of Reg NMS ‘will require a great deal of the SEC’s resources and attention as well as that of a broad range of market participants.’ With this is mind, it encourages the agency to focus on wrapping up key items on its agenda so that it can then switch its attention to the Reg NMS review.   

In the latest letter, Sifma managing director and associate general counsel Theodore Lazo reiterates the group’s position that there is a need to lower the access fee cap. In a transaction, exchanges receive the difference between a taker’s fee and the rebate paid to the relevant maker. According to Lazo, exchanges generally charge takers at or near the highest access fee allowed - the access fee cap - under Reg NMS, which is $0.003, or 30 cents per 100 shares (30 mils).  

‘The access fee cap has not been adjusted since [Reg NMS] was adopted, and it has become outdated and no longer reflects the market’s prevailing economics,’ Lazo writes. ‘Despite the narrowing of spreads and decreases in commissions, the access fee cap has remained at 30 mils.’ The ‘relatively high’ level of access fees has led to them becoming a disproportionate amount of overall transaction costs, he adds.

Sifma wants the cap on access fees to be lowered to 5 cents per 100 shares. It argues that this would benefit investors by reducing the transaction costs associated with the maker-taker pricing model that are ultimately borne by them.

In terms of transparency, the SEC in 2016 proposed amendments to rules 600, 605, 606 and 607 of Reg NMS with the aim of giving investors more and consistent information to better assess a broker-dealer’s order routing practices. Sifma supports this plan, though it suggests it various changes to it to provide more useful disclosure. ‘We urge the commission to incorporate our suggestions and to adopt the rules promptly,’ Lazo says.

In 2015, the SEC proposed to amend Regulation ATS to increase public information about alternative trading systems (ATS), such as dark pools, that trade NMS stocks. The proposed amendments would, among other things, require an ATS to publicly disclose information about its operator and the ATS’s operations.

As with the proposed Reg NMS changes, Sifma supports the SEC adopting the proposal, if a number of adjustments are made to ‘appropriately balance the benefits of public disclosure and commercial confidentiality,’ Lazo writes.  

In addition, Sifma recommends that the SEC renew the commission’s Equity Market Structure Advisory Committee (Emsac) charter, which is due to terminate on January 9, 2018. ‘The Emsac has proven to be an important forum for providing industry perspective and input to the commission on critical equity market structure issues, which is currently lacking in NMS plans,’ Lazo says.

Ben Maiden

Ben Maiden is the editor-at-large of Governance Intelligence, an IR Media publication, having joined the company in December 2016. He is based in New York. Ben was previously managing editor of Compliance Reporter, covering regulatory and compliance...

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