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The Changing Landscape of U.S. Trading

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  • Changes to rule 606(b), the transparency and the NMS market data rule will increase data transparency and level the playing field for investors and traders.

  • New order types have also been introduced to improve the quality of execution and keep more trades on the lit markets

  • These rules were created under the previous administration, but the new one will have to see them through.

As the Biden presidency passes its first 100 days in office and plans its post-pandemic economic recovery, market attention is turning to the implementation of new trading rules meant to transition it away from systems that long catered to select legacy exchanges that controlled the flow of data.

New rules aimed at updating out-of-date systems, and the introduction of new order types, will soon become a focus for Biden’s SEC chairman nominee Gary Gensler. New rules and recently implemented order types are expected to make the electronic trading landscape more transparent, while a new market data rule will give all market participants access to the data deemed necessary to make an informed trade. Of note, there will still be proprietary data feeds available for those who want to pay. Still, the reform takes subsets of what used to be deemed proprietary and puts it into the Securities Information Processor (SIP).

Updates include changes to rule 606(b) and the national market system (NMS) market data ruling that updates governance and the data included in the SIP and modernizes the exchange-listed national market system, giving institutional investors a viable alternative to proprietary data feeds.

The new rules mark a sea change for institutional clients, allowing them to preserve more alpha around investment ideas and ultimately be more competitive. At the end of the day, the rules could keep more money in investors’ pockets by helping to secure a better quality of execution.

What the changes have in common is their focus on transparency and better quality execution, including in how exchanges have been able to charge for market data in an ever-increasing way since going private, with little competition. Changes to market data will provide institutions with a viable alternative to the exchanges’ proprietary data feeds, which then helps them make more informed trading decisions, ultimately improving outcomes for investment manager-run retirement plans, pension plans, 401Ks and other, longer-term portfolios.

Transparent Playing Field

Among the most important changes are those designed to modernize the SIP, which has lagged in its ability to provide market data to all participants in a timely, fair and efficient manner. The reform is significant because it addresses the content and governance of the SIP as markets evolved and become more electronified, and odd lots, Depth of Book and auction data, while historically reserved for the proprietary feed, evolved into being a staple for making trading decisions.  Under the new rule, exchanges are required to make that data available in the SIP, taking away from the value-proposition of only subscription-based access to the proprietary feed.

Reforming the SIP changes a long-standing paradigm and, for the first time, will allow it to become more competitive as an organization, in areas ranging from the way it is governed to what makes up its core data set and who is allowed to distribute that data.

The two new order types introduced last year are designed to improve the quality of execution. The IEX D-Limit order type uses artificial intelligence to predict when prices are about to change, which protects traders from latency arbitrage trading strategies, while the CBOE periodic auction allows market participants to access price-forming auctions throughout the trading day, which then helps them quickly find liquidity.

Markets have been geared toward fast execution of small size lots and rebate incentives to encourage people to put order flow on their particular exchange. The new order types take a different approach: They aim to get the largest orders done and protect information leakage for those orders. These are big shifts on a macro level to the kind of systematic approach that institutions are taking in the electronification of the marketplace.

Change-focused administration

Following changes made under the previous administration under bipartisan agreement, the SEC is expected to continue moving the sector toward greater transparency under Gensler.

Some exchanges are opposed to the NMS market data rule, which improves access to market data and removes exchanges’ ability to charge for certain information. While approved by the SEC, the reform is now held up in litigation filed by the exchanges that govern the SIP.

On the other hand, exchanges are doing their part to innovate with new order types. In March, the CBOE periodic auction was approved by the SEC, adding an innovative, intraday auction mechanism to introduce periodic auctions on Cboe BYX Equities Exchange. Cboe expects to launch the auctions in the third quarter of this year.

Key to successful implementation of the NMS market data rule will be the appointment of a new Director of the Division of Trading and Markets, a post previously held by Brett Redfearn. The new director will need to continue in his footsteps and champion the changes in market data, transparency and overall competitive market forces.

What is clear is that changes have momentum behind them, despite opposition, with support from both parties to create a fairer market structure, and that is expected to continue with Gensler at the SEC’s helm.

Changing Landscape

The implications of these changes go beyond costs and transparency – they will also impact overall industry innovation and the competitive landscape. As institutions become more systematic in their approach and increasingly evaluate the quality and cost of trading, they will reward the providers that give them the best results. Similarly, innovation continues to focus on delivering these outcomes in the context of a growing number of exchanges, ATSs and order types.

Changes in the trading environment will also see strategies – and investors – evolve, marrying top technologies with the best minds and solutions in the business. 

As the United States plots its exit from the worst crisis of our times, the changes to the electronification of the U.S. trading environment will be a significant lever to pull, allowing investors to preserve more alpha, be more competitive and keep more money in the pocket of the average American. That will ultimately help the U.S. economy recover after the pandemic ends.

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Joe Wald Managing Director, Head of Electronic Trading


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