What are the new market data rules imposed by the SEC and why are they contentious?
With respect to market data, there is very little competition in terms of how people can source it. The new rule basically outlines new competition as well as a new model of competing consolidators to participate in the market data distribution business. It’s really trying to find a way to introduce more competition. Ultimately, the goal is to lower the costs of market data for investors and for market participants to be on a level playing field, see the same type of data, and use it in a way that could help them continue to drive innovation.
Exchanges have typically offered proprietary data feeds, and if people feel that’s important to their business, they should be able to have it, but what they shouldn’t have is an informational advantage in terms of what they can get versus what the rest of the market can get. That includes things like depth-of-book, which is something that you can buy from an exchange but you couldn’t get on the SIP. Closing and opening auctions have become exceedingly critical, thereby making auction data more essential for traders. That data, along with odd lot data, were things that were only available in the proprietary data feeds.. The regulation is not addressing the speed or the cost of the market—the SEC can’t fix prices—but these changes address the definition of core market data. I think that that was probably the most contentious part. Now it’s been upheld as something that the Securities and Exchanges Commission (SEC) can move forward with.
The Transaction Fee Pilot proposal was defeated in the courts, and it was concluded that the SEC did not have the authority to conduct market-wide or potentially disruptive pilot programmes, but they could in fact make rules. This market data proposal actually has become a rule now. That was challenged and upheld, so the precedent is good in terms of the court backing the SEC’s ability to make new rules. Gensler has laid out a very specific agenda for what he wants to see. It’s a major overhaul, more or less a Reg NMS 2.0, that’s expected to come out later this year and no doubt is going to be challenged in the courts.
What is the core aim of Gensler’s proposals?
The core changes are to make the market not only more accessible, but more efficient and more effective for investors. Ultimately, if you look at this Reg NMS 2.0, the outline is addressing issues like tick size, order flow, and how order flow competition can further enhance clients’ ability to interact with natural liquidity. Retail investors are able to participate in the markets in a way that they’ve never had before due to things like 0% commissions, and you have good execution quality around that, but that doesn’t mean you stop there. Currently, retail is predominantly disintermediated from other natural liquidity—specifically institutional liquidity that resides on-exchange or in dark pools in the US—and that’s something that still needs to be addressed.
Do you see similarities with regulatory approaches in the EU/UK markets?
I definitely see similarities. The UK regulators as well as US/Canadian regulators all recognise that the better their markets perform, the better the access to liquidity is, the more transparency there is, and the less friction that there is in interacting in the market, the lower the cost is, and the better it is for investors and for investment in those markets. Europe’s been talking about consolidated tape for as long as I’ve been in the business. There’s no question that that has been a hallmark of the US market structure, even though it hasn’t been perfect and it needs to be reformed.
How do you expect a consolidated tape will impact continental Europe?
The more transparency you have and the more holistic your view of the markets is, the more competitive the market becomes to deliver better execution quality. It’ll be easier to hold execution providers accountable, easier to measure performance, and easier to see what a good price is. It’s something that we’ve been talking about for a long time. I think that brokers and technology providers have done a good job of putting the market together in a way that they can go and access liquidity effectively, and that has definitely inspired a tremendous amount of competition around execution quality and performance. The next step of having a real consolidated tape makes it easier for investors to understand and appreciate what and where pricing is.
Do you expect retail to take hold in Europe in the same way that it has in the US?
Retail is extremely important. The proliferation and democratisation of access to the financial markets for retail has been incredibly positive for markets. In any economy that’s looking for people to invest, see the plan for their retirements, and grow their own wealth and net worth, it is important. Europe and the rest of the globe is seeing that, and I think they’re making changes to the market structure to make that more open, more transparent, more accessible.
BMO recently launched a desk in Europe, how’s that going?
What we’ve been able to do in Europe in the short time that we’ve been live, and will continue to do over the course of the next few years, is really thanks to our deep understanding of market microstructure and our expertise in building algorithms tuned to the market structure. . Our holistic approach is all about being empirical about everything, having the ability to be iterative and run experiments, and then ultimately being collaborative with our client base. The European institutional community has really embraced that philosophy, especially with the type of technology and the people that we have behind it. We’re looking forward to continuing to grow. Next year is going to be a huge year of growth for us.