The U.S. Securities and Exchange Commission is keeping close tabs on developments in listed derivatives, especially around fees charged, as in the payment for order flow model, where exchanges pay sell-side institutions to handle their customers' trades.
“I'm looking at the market structure of the listed options market, and the conversations I have with market participants are around some of the feedback I've been getting over the last year and a half regarding the overall quality of the market, and whether or not the various different crossing mechanisms and the changes in the fees that are being applied in that space are having an impact,” said Heather Seidel, associate director at the division of trading markets at the SEC, during a panel discussion at Sifma’s listed options symposium last week.
Fees, said Seidel, are “complex, they're highly segmented, they change a lot, and so that’s where I think a lot about how a regulator should look at fees. They come to us in filings, we have to look at them, we have to assess them under the Exchange Act standards, which is a rather difficult thing to do at times.”
Ed Haravon, chief operating officer, a market making firm in listed equity options, noted the impact of the Options Clearing Corp. being designated a systematically important financial market utility by the Financial Stability Oversight Council, which requires compliance with prescribed risk management standards and heightened oversight by US financial regulators.
The designation as a SIFMU is important because of “the effects it has on the clearing firm members in terms of what they need to provide, how that gets passed through to market makers,” said Haravon. “So, a different landscape as the OCC evolves in its role as a clearing member in the world surely has trickle down effects on the market making community and that's being watched very closely.”
Haravon added, “No one is going to argue against having a more stable utility to provide growth for the future for the industry, but the total cost of it has been significant and will continue to be significant, and affects market makers directly and the quality of markets going forward. It surely affects barriers to entry into the market, it affects new players, and it affects people's ability to grow and to provide more liquidity.”
Seidel said that the SEC was being more data-driven in its approach to assessing market structure.
The agency is focused on “data, and trying to dig down into the data and to get some insight or answers to a lot of the questions that come up, because we hear from a lot of different market participants that have different views about the same topic,” she said. “So in the past few years, I think this division as a whole has focused on being more data-driven, more empirical in trying to look at the data that's available to us to try to help us in our analysis of these.”