Regulators are undertaking a comprehensive data-driven review of the rules underpinning the U.S. equity markets, including the pricing and rebate system used by exchanges, the head of the Securities and Exchange Commission said on Monday.
The SEC is looking at its National Market System rule set, as well as the role of exchanges acting as self-regulated organizations, to see if adjustments should be made to help reduce complexity, improve transparency and make the markets more robust, said SEC Chair Mary Jo White.
One of the issues that the regulator is looking at is the "maker-taker" model of fee-based incentives used by many exchanges to attract traders. In that system, brokerages earn rebates by sending in resting orders to bring more liquidity, and must pay fees if they take away liquidity through orders that can be executed immediately.
But critics argue that maker-taker pricing distorts stock order routing practices.
"Maker taker is one of the issues we've heard a lot about," White said at the Securities Industry and Financial Markets Association's annual meeting. "It's clearly an important priority as we're going through this review, but again, we want to be data-driven and be right about whatever adjustments that we make."
She also said that the SEC plans to finalize, possibly by year-end, a new rule known as Regulation Systems Compliance and Integrity, which focuses on strengthening exchanges and certain "dark pool" trading venues against technology failures and cyber attacks.
That rule was proposed following a raft of high-profile technology snafus in recent years, including the botched initial public offering of Facebook Inc (FB.O) by exchange operator Nasdaq OMX Group (NDAQ.O) and the near collapse of Knight Capital, now part of KCG Holdings (KCG.N), after it suffered a $461 million trading error.
"You never get to a point where you sort of declare 'mission accomplished,'" White said. "The markets have evolved and continue to evolve and technology is continuing to evolve, and so it is a process to enhance the resiliency and robustness of the market."
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