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Market Structure Advisory Panel Members to Be Announced Soon

The SEC is close to announcing the members of its Market Structure Advisory Committee, a panel regulators are forming to help review possible reforms to safeguard the stock markets from sudden disruption. An unprecedented increase in automated trading in recent years has made U.S. stock markets more vulnerable to sudden failures.

The SEC may name the members of its Market Structure Advisory Committee in the next few days.

The regulatory agency is setting up the panel to help it with possible reforms to the stock market. The panel will help the SEC “comprehensively review the structure of our equity markets to optimize them for the benefit of investors and companies seeking to raise capital,” SEC Chair Mary Jo White said on January 3, 2015, during a speech before the Association of American Law Schools Annual Meeting in Washington.

In a June 2014 speech, in New York, White said the panel is being set up partly in reaction to her continued concerns that the unprecedented increase in automated trading in recent years has made U.S. stock markets more vulnerable to sudden failures. At the same time, some large mutual fund companies and members of Congress have questioned the fairness of U.S. stock markets, citing the Michael Lewis book, Flash Boys and its account that the hedge funds and brokerage firms that use high-frequency trading have a built-in advantage over other market participants, especially retail investors.

Staffers from the SEC’s Trading and Markets Division are working on some short-term initiatives, such as developing an anti-disruptive trading rule that would constrain market participants from aggressive trading during periods of high market volatility.

For longer term projects, the SEC staff plans to work on some development papers and get input from the advisory panel on more difficult issues. Some papers will review Release No. 34-51808, Regulation NMS, (for National Market System), which was implemented in 2007. In recent years, as the number of trading disruptions have increased, criticism of the trading practices instituted by Reg NMS has risen.

The staff also wants information about continuing with the SEC’s long-established practice of supervising U.S. securities exchanges indirectly as self-regulatory organization (SROs). The agency wants to know if the market structure should be geared more toward smaller company stocks. Under the SRO system, the exchanges write rules to supervise their trading activity. But the rules require the SEC’s ratification before they become effective. The exchange rules also apply to the broker-dealers who are the chief customers of their trading platforms and compete with the exchanges for order flow. In the past decade, exchanges have changed from member-owned utilities to for-profit corporations, and the competition for order flow has intensified.