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From Securities Regulation Daily, October 2, 2013

White announces new SEC initiative to promote understanding of equity markets

By Jacquelyn Lumb

Chair Mary Jo White announced at today’s Security Traders Association conference on market structure that the SEC is launching a new initiative to promote a greater understanding of the equity markets backed by empirical information. A new website should be available as early as next week which will contain data, research and analysis, some of which will be drawn from the market information and data analysis system (MIDAS) that began operations in January. White said this new tool will transform the debate on market structure by focusing on data rather than anecdotal information.

Problems in equity markets. White noted that the success or failure of capital formation in the equity markets depends on investors and public companies. She reported that the number of U.S. listed companies has declined to approximately 4,900 from a high of more than 8,000 in 1997 and said one must ask whether this decline reflects problems in the equity market structure, particularly given the dramatic changes in recent years.

Market structure issues are among White’s top priorities. She expressed concern that as the complexity of the market structure has grown, so has the complexity of the diagnoses and solutions. White emphasized the importance of focusing on a few fundamentals in the market structure review, beginning with technology and the need for market integrity.

The risk of failure is inherent in any technology system, according to White, but the goal should be to aim for zero tolerance for errors and interruptions. She said the recurrence of market disruptions over the past year and a half can undermine the confidence of investors and public companies in the integrity of the U.S. equity market structure as a whole.

Improvements to technology. White met with exchange representatives last month and challenged them to improve the resilience of the technology surrounding their critical market infrastructures. She anticipates a comprehensive action plan that addresses the standards necessary to establish highly resilient and robust systems for securities information processors. She has also asked the staff to encourage the exchanges, clearing agencies and FINRA to map their other critical infrastructure systems and provide assessments of their robustness and resilience.

Testing assumptions. The second fundamental is the need to identify and test the assumptions about market structure. White said the market has evolved to be one-size-fits-all. She said the assumptions appear to be based on long standing market practices, statues or regulations. The SEC has the authority to treat different types of stocks differently, and White has directed the staff to work with the exchanges to develop a plan to implement a pilot program that would allow smaller companies to use wider tick sizes.

White said the current nature of exchange competition and the self-regulatory model should be evaluated in light of the evolving market structure and trading practices, including a consideration of whether the current structure continues to meet the needs of investors and public companies.

Empirical evidence. The third fundamental is that decisions must be based to the extent possible on empirical evidence. In her view, the current discussion is rooted more in anecdote, and sometimes self-interest, than in evidence. White looks forward to feedback on the SEC’s new initiative that will provide key market metrics and trends based on the billions of MIDAS records.

Ultimately, White said that investors and companies must have reason to believe that any problems in the U.S. equity markets can be properly diagnosed and addressed.

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