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Gallagher reiterated it is time for the SEC to conduct a "holistic review" of the equity markets. He highlighted three specific areas:
a) Reg NMS, the 1974 SEC regulation that opened up competition among stock exchanges and aided the development of high-speed trading.
Gallagher has been critical of Reg NMS in the past, claiming it has created many unintended consequences. But he has become more vocal of late, and in our discussion he has insisted Reg NMS itself has played a role in the markets current disjointed nature (11 exchanges, 40 dark pools, etc).
He was particularly critical of the "trade-through" rule, which requires that all exchanges execute trades at the best possible price. This sounds reasonable on paper, but the crazy-quilt system that has been created to connect all the exchanges to each other has created numerous operational difficulties and technological points of failure.
Gallagher instead proposes that exchanges be required to adhere to a broad "best execution" rule, which in addition to price would include considering the number of markets trading the security, the size and type of the transaction, and the terms and conditions of the order as communicated to the firm.
Gallagher also insisted the SEC should focus on the responsibility of broker-dealers to adhere to best execution practices, rather than focusing solely on exchanges.
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b) The Self-Regulatory Organization (SRO) model by which stock exchanges regulate themselves. Gallagher questions whether exchanges should regulate themselves at all, not because they are incapable, but because over 35 percent of all stock trading today occurs in Alternative Trading Systems (ATS) like dark pools that are largely unregulated.
The rules that apply to exchanges do not apply to these dark pools; Gallagher insists that the heavier regulatory burdens exchanges operate under put them at a competitive disadvantage and that it is time to examine whether all trading participants should be brought under one regulatory scheme.
c) The Securities Information Processor (SIP) which consolidates and disseminates market data. Each SIP is currently controlled by an affiliate or subsidiary of one of the exchanges.
Gallagher points out the lack of an alternative system to disseminate market data has created a single point of failure for the system. In August 2013 the failure of the NASDAQ SIP led to the suspension of all trading in NASDAQ equities for most of the day.