United States: SEC Chair Highlights Intersection Of Finance And Technology In Equity Markets
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At the Global Exchange and FinTech Conference, SEC Chair Gary
Gensler described how developments, such as
payment for order flow, gamification and best execution in the
national best bid and offer (“NBBO”), have increased
market segmentation and market concentration in the equity
markets.
In his remarks, Mr. Gensler contrasted the “lit”
exchange markets (e.g., Nasdaq and NYSE) with off-exchange
wholesalers, stating that wholesalers gain an advantage when it
comes to pricing because they can price their segmented order flow
by referencing the less competitive NBBO, whereas exchange
market-makers must compete with each other on an order-by-order
basis. Mr. Gensler also noted that payment for order flow and the
growing impact of data have led to a market concentration within
the off-exchange market-maker space, in which data from the
transaction flow increasingly goes to a small group of wholesalers,
who then gain an advantage from access to this data.
With regard to gamification, Mr. Gensler stated that, while such
behavioral prompts in brokerage apps generate more active trading,
this same “active trading” is correlated with lower
returns for the “average investor.”
Mr. Gensler cautioned that a broker-dealer’s best execution
obligation may not be met by execution at the NBBO, which is not a “complete enough” representation of the market, as it
does not reflect (i) dark pools and wholesalers, or (ii) a
significant portion of trading that happens away from the lit
markets as a result of market segmentation.
Mr. Gensler also expressed his support for shortening the
standard settlement cycle, not only to T+1, but to same-day
settlement: T+0 or “T+evening.”
Commentary
Chair Gensler raises important questions on market
structure. Markets and market technology have changed since the
adoption of Regulation NMS. Improvements require periodic and
substantial revisits.
That said, pushing for T+0 settlement seems to be
evidence of an overwillingness to force changes that may be
detrimental in practice. The rate and amount of change
simply may be more than businesses can bear. The impetus to
move to T+1 settlement was arguably an overreaction to issues
caused by the GameStop run-up; achieving T+1
settlement will require substantial operational changes and
costs. Is there really a material benefit to advocating for
same-day settlement? Substantial regulatory and technology changes
on this scale contribute to driving firms out of business because
they do not have the size to support the associated costs.
Primary Sources
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