Four Key Ways to Improve Equity Market Structure

Adam Inzirillo
February 14, 2020

In January, Cboe published its vision for equity market structure reform. Our goal in drafting this report was to create a new dialogue – to shift the focus to what’s working well and what could be enhanced. Our customer-first approach means we value investor choice and we are dedicated to defining markets that are beneficial to all those who participate in them. We’ve already received great industry feedback on this document and want to keep the momentum going. If you haven’t had a chance to read it, here are some highlights:

Current Market Structure Serves Investors Well

Cboe invites market participants to understand the current market structure and determine if proper solutions have been presented. Since the later part of the 1990s there have been a number of rules implemented to enhance the investor experience. Limit order display obligations were made to ensure proper representation of retail orders in the public markets. Rule 605 also was implemented to provide meaningful best execution statistics for retail held orders; primarily using the publicly available quotation for a barometer of performance.

Moreover, there have been a number of proposals focused on greater transparency of broker order handling practices. In February 2019, Regulation ATS-N was introduced so investors could be more informed about registered Broker Dealer Alternative Trading Systems -- providing the investor community with an understanding of order types, segmentation and potential quantitative scoring that may enhance interaction based on client instructions and order parameters. Finally, Rule 606 was updated to provide greater clarity on broker dealer order routing practices and how an investor order may be routed to various market centers. Overall, investors are in a far better place today than prior to 1999 when many of the aforementioned rules began to take shape.

Protecting Public Markets

In recent months, the market has noticed an increased shift to off-exchange trading, with intraday day numbers reaching as high as of 50% of all volume in certain symbols intraday. Beyond Alternative Trading Systems, public exchanges and few publicly available guidelines, there is limited knowledge on how the off-exchange market will continue to progress. At some point, the publicly available quotation will begin to deteriorate, which impacts execution performance statistics for held and not held orders.

In our report, Cboe proposes a number of items to further enhance the public markets and build on the foundation that regulators intended. Reg NMS was created in 2005 and, given the continued proliferation of exchange trading centers, it is due for an overhaul. We’re advocating for enhancements that promote greater transparency and ensure best execution for the investor community.

We value investor choice and their ability to interact with displayed and non-displayed trading centers but it is time to level the playing field. Exchanges should have the opportunity to compete with off-exchange order flow. Our report is focused on four key modifications:

  • Reduce the standard round lot size from 100 shares to 10 shares or 1 share for high-priced securities, and broaden odd lot transparency by disseminating top-of-book odd lot quotation data through the Securities Information Processors (SIPs).
  • Implement SIPs in multiple locations in order to significantly reduce the geographic latency that slows the receipt of consulidated real-time quote and trade information.
  • Enact a targeted reduction in tick sizes for securities priced above $1.
  • Establish sub-penny pricing standards that permit fair and competitive price-improvement opportunities between exchanges and off-exchange venues.

Cboe believes these proposals enhance the investor experience and as a result further limit the deterioration of the publicly available quotation. We look forward to participating in discussions sparked by these and many other proposals. We are excited to set forth real reform in 2020 and beyond.

Read “Cboe’s Vision: Equity Market Structure Reform