SEC's Peirce: Are Equity Market Structure Rules Outdated?

The central role of government in designing the equity market structure seems a bit outdated, according to a recent speech given by SEC Commissioner Hester Peirce.

Peirce, who was appointed by President Donald Trump to the Securities and Exchange Commission and was sworn in on Jan. 11, was a keynote speaker at the SIFMA Equity Market Structure Conference in New York.

In her speech, Peirce looks back to the enactment of the Securities Acts Amendments of 1975. She does this “to understand why — perhaps uniquely among American marketplaces — every interaction of participants in the U.S. equity markets is carried out according to specifications either mandated or approved by the Commission,” she says.

When enacted, the ’75 Amendments represented an “ambiguous mandate” to the SEC, according to Peirce.

“On one hand, they instructed the Commission to remove barriers to competition in the equity markets,” she said. “On the other, they directed the Commission to manage that competition consistent with the public interest.”

Peirce explains that the central mandate of what would become Section 11A of the Exchange Act — that the Commission “facilitate the establishment of a national market system” — was “capacious enough to accommodate either an industry-centered or a Commission-centered reading of the amendments.”

However, other parts of the statute were less ambiguous. According to Peirce, the ’75 Amendments extended an invitation to the Commission to involve itself in micromanagement of market infrastructure and interactions.

As Peirce explains, the exchanges saw their activity subject to extensive scrutiny by the SEC, which gained the authority to approve or disapprove SRO rule changes and to change or abolish those rules. The SEC also was given “pervasive rulemaking power to regulate all organizations engaged in the business of collecting, processing, or publishing information relating to quotations for and transactions in securities.”

According to Peirce, some say that this “generous grant of authority” to the SEC was justified given evident market failures.

“After all, the equity markets had manifested obvious and severe deficiencies in the late 1960s and early 1970s; a small number of markets dominated equity trading and resisted the publication of quotes or trading data; and linkages between the markets ‘were primitive or even nonexistent,’” she explained.

However, Peirce said that it’s not at all clear to her that the expansive role for the SEC mandated by the ’75 Amendments was warranted by these challenges confronting the equity markets at the time.