According to the Financial Times, “a market, can be either ‘concentrated,’ where most, if not all, trading in a set of securities is conducted in one or two trading centers or ‘fragmented’ where investors send orders to numerous trading venues that all compete with each other for order flow. A trading venue can be a physical place like the floor of the New York Stock Exchange.”
The U.S. equity market structure falls into the fragmented category. Driven by government regulations that led to technological innovations and competition among trading venues resulting in lower cost for buying and selling stocks, the U.S. market is highly liquid and accessible, but it is also complex.
When the market’s structure is so fragmented, it “opens the door to disparate treatment that discourages investor trust and confidence in the market,” said Kenneth E. Bentsen, Jr., SIFMA’s president and CEO.
In order to promote confidence among investors, SIFMA is calling for regulators to adopt recommendations to enhance market structure in order to achieve more transparent markets.
Some of SIFMA’s proposed changes to market structure, which Bentsen and Curt Bradbury, COO of Stephens, Inc. and Chairman of SIFMA’s Market Structure Task Force, detail together in a New York Times op-ed, include encouraging transparency and fairness in the markets, as well eliminating access fees charged by exchanges. “Together, these changes would reduce the risk of market instability that is inherent in a highly fragmented, complex market system,” write Bradbury and Bentsen in their New York Times piece.
Transparency plays an important role in reforming market structure, and SIFMA has recommended that financial regulators adopt highly transparent policies for investors.
Individual investors, for instance, would receive public reports from their brokers that detail precisely how their orders were routed. This sort of information would allow retail investors to make more informed decisions and increase their confidence in investing in the U.S. markets. For larger institutional investors, SIFMA recommends policies that mandate standardized public disclosure of trading volumes.
“Market participants should provide investors with better disclosure of relevant information in a standard, easily understood format,” write Bentsen and Bradbury.
Other recommendations for market structure reform include standardizing kill-switch procedures, which would cease trading activity if the market plummets a significant percentage point in a single day, as well as developing a price band that would prevent trades from taking place outside predetermined pricing parameters.
“Increased transparency will increase investor confidence, which is essential to a robust equity market system that can stimulate economic growth in the United States,” Bradbury and Bentsen conclude.