11/2/18

Three Days in D.C. - Spirited Sessions Drive Improvements

Tom Jordan
President, Jordan & Jordan

I spent three business days in D.C. and I was encouraged by the dialogue and potential way forward on several fronts.  I understand why you might be confused.  I was not at 1600 Pennsylvania Avenue, N.W. or at the Capitol but at 100 F Street N.E.

October 25th- 26th was the SEC Roundtable on Market Data and Market Access. October 30th was an FIF meeting with SEC Trading and Markets staff and with Counsel to Commissioner staff regarding modernizing Rule 605.

Chris Concannon, President of CBOE said at the annual STA Conference, “two days on market data, bring a pillow.”  No pillow was required; the passion, the strong rebuttals of assertions and the alternative facts kept our interest. Some conclusions I took away

  • There was consistent support for the experience of the individual investor starting with the introduction by Chairman Clayton and communicated by all sectors on the 7 panels. There was consensus that the individual investor has never been in a better place and we must all work to improve and/or maintain that experience. This is especially the case when you compare it to other geographies.
  • Where you stand, depends on where you sit. Brokers and asset managers believe they are paying too much for market data whereas the exchanges contend that it is part of the overall trading experience and you cannot look at one sector of the trade cycle in isolation.
  • Depth of book is not necessary to assess best execution. Many firms solely use SIP data and are not in regulatory trouble. Retail investors are excellent examples of that situation but there are institutional clients also. Firms will use depth of book for commercial reasons and once you have the information, you may have different best execution responsibilities. 
  • There’s a lot of confusion on SIP purpose and performance. FIF meetings with capacity, traffic and latency are useful but should be expanded to add more data, e.g. providing trade and quote revenue to participants and revenue earned by fee type.
  • Adding depth of book data to the SIP feed is not a good idea.  Many firms do not need depth of book. Why burden those firms with additional data and additional cost? Many panelists gave significant testimony on the difficulties for small brokers; we do not want to add to that challenge. Adding odd-lots is appropriate if the industry can address whether they are protected and whether they will be placed at top of book.
  • Cost data from exchanges will be needed because it is required for the SEC to fulfill their obligation. Exchanges seemed to be willing to provide data to the SEC if not publicly distributed. This will not satisfy everyone but is a good first step.
  • CTA/UTP Advisory Committee has effectively encouraged the CTA/UTP Operating Committee to provide more transparency. The Advisor impact is evidenced by the selection of 5 of their members to be on panels at the Roundtable. Although the number of seats is at issue, the migration from advisors to voting members seems to have some momentum.
  • Contracts are complicated and not consistent across exchanges. Achieving consistency across all exchanges will be challenging especially when you consider that firms deal with multiple asset classes and geographies. However, we should start with consistency of CTA/CQ and UTP contracts/practices as a realistic first step.
  • It’s easier to standardize before going into production which requires changes to current procedures so it’s best to get ahead of new issues.  A good example is the FIX Trading Community working with FIF to create the standard on how firms will pass the Firm Designated ID (FDID) from firm to firm as required by CAT.
  • Market data costs are significant. While firms are lobbying to lower them through legal and regulatory hearings, they should take every opportunity to lower expenses today. Some basic activities include: paying one exchange fee per person (MISU), netting, development credits, ensuring stay in compliance to minimize audit risk, eliminating duplicate or unused services, managing entitlements proactively and understanding what type of data is needed.

The Rule 605 meeting on October 30th was less contentious than the market data roundtable because no one is opposed to modernizing Rule 605. Why is that?

  • The recommendations reflect the evolution of the market since 605 was first codified in 2000. Some of the industry changes are Reg NMS, smart order routing and web trading for self-directed investors.
  • Retail investors will have better information to evaluate their wholesale vendors.
  • Changes reflect what is common practice for some of the larger players but codifying the information in the 605 regulation gives it more credibility and allows smaller retail brokers to benefit from this information.
  • The updated rule takes nothing away; some examples of the additions include:  odd-lots which represent close to 50% of self-directed orders, away-from-the-quote Non-Marketable Limit Orders (NMLOs) and those entered before market open, and short-sale orders.

So, what was the consistency of the three days?

  • The interests of Main Street Investors are key.
  • There was focus on transparency and best execution.
  • Odd lots should be added to SIP and Rule 605.
  • We have the best Capital Markets system in the world, but we must continually improve as the rest of the world is watching us.

This was an excellent example of the industry and the regulators working together to improve our market.

It was an informative 3 days and I look forward to enhancements in our market data and trading infrastructure as a result.