Investors are seeking greater disclosure and transparency in equity market structure reforms, according to a report published by the Managed Funds Association (MFA).
The report, which includes strong, focused policy recommendations to the U.S. Securities and Exchange Commission (SEC), are related to equity market structure reform.
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MFA represents the global alternative investment industry and its investors, important stakeholders in the discussion on equity market structure reforms. As investors in the capital markets, MFA members are one of the primary constituencies to whom the markets are meant to serve.
"Market structure reform is a serious issue that requires regulators to take a systematic, data-driven and unbiased approach, considering perspectives from all constituencies," said Richard H. Baker, MFA President & CEO.
"As investors, we believe that markets should operate to achieve their basic economic function – raising capital for businesses and providing risk-based returns for investors who provide the capital. Our recommendations will help the SEC build on the success of recent reforms and continue reducing operational risk while improving the overall quality of our markets and strengthening investor confidence."
MFA’s equity market structure policy recommendations focus on three specific areas:
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By GlobalData- Improving market resilience and risk management
- Increasing disclosure and transparency
- Implementation of careful and controlled pilot programs
The following section provides an overview of the policy recommendations MFA provided regulators. The entire document can be viewed by clicking here.
Improving Market Resilience and Risk Management
MFA offered the following recommendations to bolster risk management practices:
Pre-trade controls – The SEC or the Financial Industry and Regulatory Authority (FINRA) should provide more specific guidance on pre-trade risk controls to increase transparency to investors, encourage greater uniformity of controls among broker-dealers and reduce concerns with respect to discrepancies in latency.
Standardized kill switches – The SEC should direct the Exchanges to develop a standardized mandatory kill switch protocol, methodology and rules. This step would simplify implementation and use by exchange members and create a level playing field with respect to latency discrepancies.
Increasing Disclosure and Transparency
MFA urged regulators to build on recent reforms to improve transparency and boost investor confidence:
Trading venue transparency – FINRA should expand its alternative trading system (ATS) transparency initiative to include publishing the number of trades and weekly volume information on a stock-by-stock basis for equity securities traded over-the-counter.
The SEC should also enhance disclosure requirements by requiring an ATS to make its Form ATS publicly available on its website along with general information on how it operates and how its orders interact. The SEC should also include on its website a list of all ATSs and links to their Form ATS to improve information flow to investors and to allow them to more easily compare ATS venues.
Timely market data – The SEC should request Plan Participants of the Securities Information Processors (SIPs) to improve the reliability, resilience, connectivity and latency of the data processors — integral components of the equity market structure to address recent outages and other issues.
Order routing disclosure – The SEC should require broker-dealers to provide more detailed disclosure of order routing and execution practices. Exchanges should also provide clearer disclosure on order routing, order type interaction and execution volume from orders.
Exchange Order Types – The SEC should continue to ensure that order types promote just and equitable principles of trade, protect investors and the public interest, and ensure that order type information is readily accessible to market participants, including clear descriptions on function, use, and benefits.
Implementing Careful and Controlled Pilot Programs
MFA urged the SEC to take a disciplined, data-driven approach to pilot programs, as it has in the past, driven by measurable benefits to liquidity, efficiency, competition and capital formation rather than competitive interests among market participants:
Tick Size Pilot Program – MFA believes the tick size pilot program as submitted by the national securities exchanges and FINRA will harm investors by artificially widening spreads and increasing costs without any tangible benefit to market quality.
The SEC should limit its Tick Size Pilot Program to truly small cap stocks – i.e., stocks with gross revenue of $750 million or less. If the SEC is inclined to include stocks beyond small cap for a Tick Size Pilot Program, it should consider also a pilot to reduce the tick increment to a half-penny for stocks with the highest trading volumes. This will improve market quality for investors and reduce trading costs.
In the upcoming weeks, MFA looks forward to continuing to discuss these recommendations in greater detail with regulators, policy makers and industry participants.
