This week, the CFTC-SEC Joint Advisory Committee on Emerging Regulatory Issues issued its long-awaited Summary Report with recommendations “targeted at the most important and pervasive issues affecting investors and the markets.”
Basically, the committee looked at the Flash Crash report released in September and the rule changes that have been implemented since May 6 and have provided guidance on how the regulators should proceed. There’s a lot of stuff about pricing, routing, direct access, and obligations that is targeted at traders, but they also touch on liquidity and transparency which directly affects listed companies.
The committee believes that while the move toward fast, high-tech trading spread out over many venues has increased competition and reduced transaction costs, it has also created “market structure fragility in highly volatile periods” and that “liquidity problems are an inherent difficulty that must be addressed.” As such, the following recommendations have been made:
- Regulators should require that the pause rules (single-stock circuit breakers that currently apply to companies in the Russell 1000) be expanded to cover all but the most inactively traded listed equities, ETFs and derivatives on those securities.
- Exchanges and FINRA should implement a “limit up/limit down” process to supplement the pause rules. (Rather than halt the stock for 5 minutes, this would restrict directional trading for a period of time. If no new liquidity enters the market within that period, then a halt would be called).
- With regard to system-wide circuit breakers, the commission believes the markets should consider a shorter halt time and use the S&P 500 as the trigger (today, the Dow Jones Industrial Average is the gauge and there are long market-wide halts in place for 10, 20 and 30% declines).
- Regulators should evaluate additional incentives for liquidity provision that vary with market conditions. (While vague and primarily focused on pricing models, it’s worth pointing out since more liquidity generally means less volatility).
- The SEC should conduct further analysis regarding the impact of “internalized” order flow. (This refers to trades done on a broker/dealers’ desk rather than on an Exchange and accounts for at least 20% of all volume in the markets today).
We will have to wait and see what actions come out of this, but it seems like they are on the right track. If you want to read the whole report here’s the link: http://www.sec.gov/spotlight/sec-cftcjointcommittee/021811-report.pdf