Weighing in on the recent battle over how stocks trade, Wall Street's major trade group is proposing changes in how exchanges pay participants and other stock trading rules.
SIFMA (Securities Industry and Financial Marketing Association) is essentially the representative for all the brokerage firms in the U.S.--everyone from Goldman Sachs to Morgan Stanley on down to the smaller firms. Its membership also includes asset managers, like Vanguard and Fidelity.
In a statement released today, SIFMA proposed:
First: Access fees charged by exchanges should be "dramatically reduced or eliminated." There's been a lot of discussion about rebates--fees exchanges pay and charge to customers to trade on their venues.
Exchanges charge an access fee when traders want to "remove" liquidity (market orders to buy or sell a stock) and provide a rebate when they "add" liquidity (post offers to buy or sell that are not immediately executable).
The complaint: A) High fees drive some traders to other trading venues (mostly dark pools) that charge lower fees or none at all, and b) the high fees have led to an explosion of order types that have made the system too complex and encouraged excessive trading.
SIFMA recommends the SEC should reduce the current maximum fee (now roughly 30 cents per hundred shares) the exchanges can charge to "remove" liquidity to no more than five cents per hundred shares.
What would this do? It would make it cheaper to trade on exchanges, and this--presumably--would drive more trading to exchanges.
This may not seem to be in the best interests of all brokerage firms, since many own dark pools that are alternative trading vehicles to the exchanges.
But on balance, I think most participants would rather see lower costs of trading trump any economic interest in a dark pool. And most of the 300 or so members of SIFMA do not own dark pools.
IntercontinentalExchange (ICE) CEO Jeff Sprecher (the owner of the NYSE) has already voiced support for reducing or eliminating rebates.
SIFMA is also recommending the SEC look into the large number of order types. Some order types may be encouraging excessive message traffic, for example.
Second: Broker-dealers should not be required to connect to trading venues that do not add substantial liquidity to the market. There are now 11 different exchanges. Several have very little volume; yet, under Reg NMS--the major SEC rule governing market structure--all brokers are required to connect to them.
This is expensive and adds a lot of complexity to the markets. SIFMA is proposing broker-dealers should not be required to connect to a trading venue with less than one percent of average daily volume in all stock trading.
Since dark pools do not publish prices, this would not include them.
What's the practical effect of this? It's likely that three or four exchanges would drop off from the requirement that all participants connect to them.
Third: Improving SIPs. All users of market data should have access to data at the same time. There has been much debate over the fact that the market data feed provided by the NYSE and NASDAQ, the SIP (Securities Information Processor), is slower than so-called "direct" feeds exchanges offer for a higher price.
SIFMA says: "Market data feeds provided by the SIPs and the direct feeds provided by the exchanges must be distributed to all users at the same time."
However, SIFMA also said it would ultimately like to see multiple processors competing on performance.
Everyone agrees the SIPs should be upgraded and made faster, yet it's not clear what the effect of perfect parity between the SIP and the "direct" fees would be.
Exchanges, for example, charge fees for participants to be near their servers, a process known as "colocation."
Would parity lower or eliminate the value of colocation? What is the value of colocation if the speeds are provided at parity?
Fourth: Regulators should require brokers to provide public reports of order routing statistics. Much debate over whether brokers--particularly discount brokers like Charles Schwab or TD Ameritrade--should be collecting payments for directing their orders to specific venues.
SIFMA is only asking for more disclosure to demonstrate payment for order flow is not violating a directive for brokers to provide the best prices available.
These recommendations may seem modest, and there are still many differences of opinion, but there is a subtle change in the market debate occurring.
For the past fifteen years, we have seen a market structure that encourages "financial innovation:" more exchanges, more dark pools and more order types.
The result: More trading, but also more spread-out trading. A more complicated market.
But we may now be moving toward a somewhat different model. The other model could be called the "utility model," where regulators, exchanges and market participants agree to limit the amount of exchanges and dark pools and order types, either because they are not as financially viable or because of complexity issues.
What happens from here? SIFMA will be meeting with policy makers--Congress and the SEC--to discuss the recommendations.
Most of these recommendations are roughly in line with comments made by SEC Chief Mary Jo White at her June 5 speech at the Sandler O'Neill conference.
Which means there will likely be some changes made some time in the near future.