SEC Commissioner Piwowar Calls For A New Special Study of the Securities Markets

A new Special Study of the Capital Markets should be undertaken, according to SEC Commissioner Michael Piwowar. Specifically, “we should commence – in short order – a comprehensive, multi-year equity market structure review program . . .” This will permit us to “set our sights on ensuring that the U.S. securities markets remain a world leader in market quality, efficiency, and fairness, which in turn will fuel global capital formation and economic growth,” according to the Commissioner. Michael Piwowar, “The Benefit of Hindsight and the Promise of Foresight: A Proposal for a Comprehensive Review of Equity Market Structure,” London, England (Dec. 9, 2013)(here).

The last comprehensive study of the securities market began in 1961. It was a five part, thirteen chapter comprehensive review of the securities market. The report was prepared by a group which included the SEC staff and individuals drawn from the private practice of law, academia and industry. A portion of that report analyzes the “market break” on May 28, 1962 which caused gyrations in the markets similar to those of the more recent flash crash of May 6, 2010. The Special Study analyzed the events of May 1962 not just on the day of the break but in the context of the overall markets.

Since the completion of the Special Study a comprehensive analysis of the markets has not been completed. Following the Flash Crash of May 2010 the SEC staff did complete a report. It was, however, a detailed analysis of the events of the Flash. In addition, the SEC has “effectively abandoned” its 2010 Concept Release on Equity Market Structure, according to the Commissioner.

The new study would focus on three key points:

Evolution: The first step would be to “explore how it is that our equity markets have evolved to where we are now . . . For example, we must question whether the market fragmentation and intermediation that many now decry as disadvantaging retail customers may be directly attributable to Regulation NMS,” although this should not be viewed as an effort to simply roll back regulation.

Incentives: The focus would not be on abstract market structure concepts or high frequently traders. “Rather, we should ask what incentives underlie the current market structure. What drives the supposed ‘need-for-speed?’”

Choices: Once the underlying incentives are identified “we can then make choices about which alternatives may best facilitate competition on choice, pricing, and innovation.”

Critical to this undertaking is to obtain the “views and perspectives of the public to inform any market structure debate. This is where the SEC will benefit to the utmost degree from data and research.”

While this study will take months to complete, Commissioner Piwowar made it clear that he wants to move forward with “modest” reforms now. These can include items such as “a pilot program on increasing the tick size for small capitalization companies.” Implementing programs such as this will permit the Commission to move forward while conducting the study.

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