Listening to the market data and market access roundtable hosted by the U.S. Securities and Exchange Commission, one thing has become abundantly clear: The equities market structure has become so complicated that regulators cannot pull on a single string like SIP reformation without having to rethink the entire market structure.
It was telling that Commissioners Karen Stein and Elad Roisman spent much of their opening statements focused on market structure rather than on roundtable's narrower topic.
Whether there should be competitive SIPs, expanded core market data sets, or mandated transparency regarding product development, each option leads to a cascade of related market structure issues.
Two possible solutions could address the overall issues facing Wall Street. First, the SEC could revisit Regulation NMS, update it, and hope for the best. Second, step back and introduce principles-based regulation on best execution requirements. Each would take time to implement.
The first would require the SEC to get into the minutia of market microstructure while continually being lobbied by the various stakeholders to gain the best advantage in the new market structure.
Let's be honest; the regulator does not have a strong track record once it starts designing market structure or addressing specific technologies.
As Nasdaq's Dominick Paniscotti note on the Elements of the Core Data Infrastructure panel, the shelf life of today's technology is fleeting and tomorrow's even more so.
Forget if distributed ledger technology is robust enough to handle equities settlement. What happens when the five largest market makers start using quantum entanglement to transmit data instantaneously?
The idea solicited a quick joke by moderator Brett Redfearn, the director of the SEC's Division of Trading and Markets in the last few minutes of the panel discussion, but this isn't science fiction.
It wouldn't be surprising if the SEC will need to address the next generation of computing and connectivity within the next seven to ten years.
However, if the regulator adopted a more principles-based approach to regulation, it would free the SEC from being so tightly tied to market data offerings.
If a firm can demonstrate that it can achieve best execution by sourcing data from a SIP competitor or via a proprietary data feeds such as Nasdaq Basic or Cboe One, why not let them?
Let the brokers inform their clients of their best execution policy and which market data elements go into to their routing and execution decisions and let their clients decide with their commissions whether the policies are sufficient or not. It appears to be working in the EU.
