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“Although SIA has taken no position on the proposed New York Stock Exchange/Archipelago and NASDAQ/Instinet mergers, these developments have underscored the importance of undertaking market-structure and self-regulatory reform -- and getting them right,” said Lackritz. “The proposed mergers have heightened concern over market-data issues, and have presented the industry with both the need and the opportunity to bring self-regulation into the 21st century.
“The system of self-regulation backed by SEC oversight has proven very effective,” Lackritz said. “It has provided excellent protection for investors and allowed for the efficient operation of the markets. The industry’s self-regulatory organizations need to be modernized, but we must make sure we don’t lose the benefits of the self-regulatory model – it’s important to keep the ‘self’ in ‘self-regulation.’”
In his testimony, Lackritz reiterated SIA’s support for the hybrid self-regulatory model, one of seven models proposed by the SEC. The hybrid SRO model offers the best alternative regulatory structure for preserving competitive, innovative markets while fostering more efficient and effective regulation. Under the hybrid model, self-regulation would be embodied in two types of organizations that would be divided by function. Each marketplace would have its own SRO, which would regulate and enforce all aspects of trading, markets, and listing requirements. The other type of organization would be a single member SRO, which would handle regulations relating to the operations of broker-dealers (sales practices, financial responsibility requirements, qualifications of personnel recordkeeping, etc.).
The hybrid model will require the SEC to designate a single member SRO to regulate all SRO members with respect to membership rules such as financial condition, margin, registered representative qualification testing, customer accounts, sales practices, and supervision. Each SRO operating a market would be responsible for the oversight of its market operations regulation (e.g., its trading rules), including enforcement of those trading rules. The creation of the single member SRO addresses the two primary areas of weakness in the current self-regulatory structure. First, it eliminates the inefficiencies in rulemaking and examinations, and the potential for inconsistent regulation that exists in a multiple SRO system. Second, it eliminates conflicts of interest between an SRO’s regulatory and market functions with regard to membership rules.
In regard to Reg NMS, Lackritz told the committee that periodic re-evaluation of market structure is vital to maintaining the global preeminence of the U.S. capital markets and to ensuring that investors are fully protected. He commended the commission for taking on market-structure reform and for its continued efforts to engage all market participants in the process. Although the association agrees with many of the SEC’s decisions presented in Reg NMS, SIA has identified several key areas where it differs with the commission and offered the following refinements:
- Market Data -- The association expressed disappointment that the SEC did not deal with all of the market-data issues in the context of the Reg NMS debate. SIA called on the commission to resolve these issues sooner rather than later, which have taken on an added importance in light of the proposed NYSE and NASDAQ mergers.
- Intermarket Price Protection (Trade-Through Rule) -- The SEC proposed two alternatives for the trade-through rule, a “top-of-book” option and a voluntary “depth-of-book” alternative. SIA member-firms were not convinced that either approach was appropriate and recommended putting in place a National Best Bid and Offer (NBBO) model before considering implementing either of the options. The SEC, however, adopted the top-of-book approach, which will protect the best bids and offers of each exchange, NASDAQ, and the NASD’s alternative display facility. Given the vital importance and the extreme complexity of the trade-through rule, SIA argued that it would be more prudent to take a more incremental approach to implementation to ensure that “we get it right from the start.”
- Intermarket Access -- SIA supported adoption of the commission’s proposed access standards for private linkages and the proposed rule to minimize locked and crossed markets. The private-linkage approach establishes uniform market access for all by promoting non-discriminatory access to quotations displayed by SRO trading centers. The association suggested, however, that the anti-locking and anti-crossing rule include two of the proposed exceptions to the trade-through rule – flickering quotes and systems malfunctions. SIA also supported the commission’s efforts to craft a market-wide solution to the access fee problem, but still has concerns about excessive fees related to unprotected quotations, the administrative difficulties of tracking whether quotations are protected or not, and the broad definition of access fees.
- Sub-Penny Quoting -- SIA endorsed the commission’s ban on sub-penny pricing as a way to help prevent “stepping-ahead” of customer limit orders for an economically insignificant amount. This practice, over time, could discourage investors from placing limit orders, an important source of market liquidity.
Lackritz’s testimony can be viewed at http://www.sia.com/testimony/html/mlackritz5-18-05.html
