Equity Volatility Aside, Market Structure Debate Back in the Fray

Suzanne Cosgrove

Suzanne Cosgrove

Acting Managing Editor

Exchanges often have an uneasy relationship with regulation, but Adam Inzirillo, head of U.S. equities at Cboe Global Markets, began a Wednesday webinar on market structure hosted by Eventus Systems with a tip of the hat to Regulation SCI, rules adopted by the SEC in 2014 to bolster the technology infrastructure of securities markets and reduce system issues.

Markets have not seen this much volatility since 2008, but the notable thing since March has been their resiliency, Inzirillo said. “There have been a lot of comparisons with the flash crash, but we saw Reg SCI come into play,” he said.

Market-wide circuit breakers were triggered four times during the swings sparked by the start of the COVID-19 pandemic, Inzirillo said, “but when looking at ways we can improve on that, we don’t see anything significant.” There have been some clearing and settlement issues, he added, but the markets themselves have worked and “equities have been fairly efficient.”

In a fast-moving, hour-long conversation between Inzirillo and Eventus CEO Travis Schwab, billed, “The Impact of Reg NMS II on Exchanges, Market Surveillance and Order Routing,”  Inzirillo said market-structure issues like transparency that were “pushed aside” by the volatility of the past several months are coming back into focus.

The SEC put out a somewhat controversial and highly detailed proposal earlier this year to amend Regulation NMS, an update of the national market system for equity securities that became law in 2007.

The revised SEC proposal, or Reg NMS II, includes the creation of multiple securities information processors (SIPs), the elimination of a unified National Best Bid and Offer (NBBO), the expansion of core data, the creation of “round lots” of fewer than 100 shares and the modification of order display rules.    

“Do these proposals create more transparency?” Schwab asked.

“They create additional layers of complexity,” Inzirillo said, although he noted that Cboe backs certain elements of the proposals, like the hosting of SIPs in multiple locations to reduce the problem of geographic latency. Geographic latency, the result of the distance between a specific market location and a single SIP processor’s location, can slow the transmission of quote and trade information.

More concerning than the revision of Reg NMS is the sharp increase in the percentage of equity trades executed off exchange, he said.

The SEC’s Form ATS-N and amendments to Rule 606 of Reg NMS, which increase the transparency of alternative trading systems and handling of orders by broker-dealers, also “is moving in the right direction,” he added.

He pointed out that Cboe now operates both off-exchange and lit markets in Canada (following its recent acquisition of the Canadian ATS MATCHNow) and in Europe. “We need to step back and ask, ‘Why can they do both in Canada and Europe, but not in the U.S.?’” he said.

A complete recording of the webinar will be available on the Eventus website, eventussystems.com, later this week.

 

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