0001 1 U.S. SECURITIES AND EXCHANGE COMMISSION 2 3 4 5 6 EQUITY MARKET STRUCTURE 7 ADVISORY COMMITTEE MEETING 8 9 10 11 12 13 14 Friday, July 8, 2016 15 2:02 p.m. 16 17 18 19 20 21 22 23 U.S. Securities and Exchange Commission 24 100 F Street, N.E. 25 Washington, D.C. 0002 1 PARTICIPANTS: 2 3 Mary Jo White, Commission Chair 4 Kara M. Stein, Commissioner 5 Michael S. Piwowar, Commissioner 6 Steve Luparello, Director, 7 Division of Trading and Markets 8 Mark Flannery, Director, 9 Division of Economic and Risk Analysis 10 David Shillman, Associate Director, Division of Trading 11 and Markets 12 Matthew Andresen 13 Reginald Browne 14 Kevin Cronin 15 Brad Katsuyama 16 Richard Ketchum 17 Manisha Kimmel 18 Mehmet Kinak 19 Andrew Lo 20 Joseph Mecane 21 Jamil Nazarali 22 Eric Noll 23 Maureen O'Hara 24 Joe Ratterman 25 Nancy Smith 0003 1 PARTICIPANTS (CONT.): 2 3 Chester Spatt 4 Gary Stone 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 0004 1 P R O C E E D I N G S 2 MR. LUPARELLO: Good afternoon. I would like 3 to welcome members of the committee and members of the 4 public to today's meeting of the SEC's Equity Market 5 Structure Advisory Committee. We appreciate your 6 participation as we continue the discussion we started in 7 our April 26 meeting regarding a recommendation for an 8 access fee pilot and recommendations relating to trading 9 venue regulation. 10 As a housekeeping reminder, please keep your 11 phones on mute, unless you're speaking. And, given the 12 size of the crowd, if you do speak, please state your 13 name so we can all track who's speaking. 14 I'm going to quickly do a roll call before we 15 get to the substance. So when you hear your name, please 16 answer present if you are, in fact, present. 17 Matt Andresen? 18 MR. ANDRESEN: Present. 19 MR. LUPARELLO: Reg Browne. 20 MR. BROWNE: Present. 21 MR. LUPARELLO: Kevin Cronin. 22 MR. CRONIN: Present. 23 MR. LUPARELLO: Brad Katsuyama. 24 MR. KATSUYAMA: Present. 25 MR. LUPARELLO: Ted Kaufman, I think we know is 0005 1 unavailable. 2 Rick, I heard your voice. Rick Ketchum? 3 MR. KETCHUM: Present. 4 MR. LUPARELLO: Manisha Kimmel. 5 MS. KIMMEL: Present. 6 MR. LUPARELLO: Meht Kinak. 7 MR. KINAK: Present. 8 MR. LUPARELLO: Andy Lo. 9 MR. LO: Present. 10 MR. LUPARELLO: Joe Mecane. 11 MR. MECANE: Present. 12 MR. LUPARELLO: Jamil Nazarali. 13 MR. NAZARALI: Present. 14 MR. LUPARELLO: Eric Noll. 15 MR. NOLL: Present. 16 MR. LUPARELLO: Maureen O'Hara. 17 MS. O'HARA: Present. 18 MR. LUPARELLO: Joe Ratterman. 19 MR. RATTERMAN: Present. 20 MR. LUPARELLO: Nancy Smith. 21 MS. SMITH: Present. 22 MR. LUPARELLO: Chester Spatt. 23 MR. SPATT: Present. 24 MR. LUPARELLO: And Gary Stone. 25 MR. STONE: Present. 0006 1 MR. LUPARELLO: Very good. Great. Again, on 2 behalf of the advisory committee and as the designated 3 federal officer, I would like to welcome Chair White to 4 the meeting this afternoon and ask her to make a short 5 opening statement. 6 CHAIR WHITE: Okay, good afternoon, everybody. 7 And I also add my welcome to this special telephonic 8 meeting. 9 I'm not going to have substantive opening 10 comments today, as I highlighted at your last meeting in 11 April a number of issues of particular interest to me on 12 the recommendations that are again obviously the subject 13 of today's agenda. 14 After any opening remarks from my fellow 15 commissioners, Steve will introduce and outline today's 16 agenda. I really do look forward to your discussion and 17 want to thank the subcommittees and the committee for 18 their continuing hard work on these recommendations, as 19 well as the expert panelists who presented their views at 20 the committee's meeting in April. And also thanks to all 21 those who have commented on the recommendations. 22 Thank you, Steve. 23 MR. LUPARELLO: Great, thank you. 24 Commissioner Stein and Commissioner Piwowar, in 25 that order, I would invite you to make opening statements 0007 1 if you'd like. 2 COMMISSIONER STEIN: Great. I just wanted to 3 welcome everyone and thank all the members of the 4 subcommittees for their hard work in bringing these 5 recommendations forward. 6 I did have a few questions I thought I would 7 pose, but I'll start out with the recommended two-year 8 pilot program to examine the impact of the application of 9 different access deeds. I am interested in the 10 discussion about what's being excluded from the pilot. 11 For example, the recommendation excludes 12 certain venues, such as inverted venues and ATSs. What 13 are the pros and the cons of doing this? How will this 14 affect the usability of the data and the conclusions that 15 can be drawn after the pilot period concludes? 16 The pilot, as it's been presented, also ignored 17 certain products such as ETFs. How would this impact the 18 data and the conclusions that can be drawn from the data 19 once the pilot concludes? 20 And then with respect to the recommendation for 21 potential changes to the NMS plan governance structure, 22 I'm interested in how or what can be done to strengthen 23 this partnership and what potential alternatives did the 24 subcommittee consider before settling on the 25 recommendations. 0008 1 So again, I look forward to today's discussion 2 and I will turn it over to my fellow Commissioner 3 Piwowar. 4 COMMISSIONER PIWOWAR: Thank you, Commissioner 5 Stein. 6 Good afternoon, everyone. I am pleased to 7 participate in this meeting, especially because today 8 represents a key milestone for the committee. The 9 meetings to date have been very productive and 10 informative. It's gratifying to see that those 11 discussions are culminating in some formal 12 recommendations. Both the regulation NMS and trading 13 venues regulation subcommittees proposals lay a strong 14 foundation for specific regulatory actions to enhance the 15 equity markets. 16 With respect to the recommendations being 17 presented, at the April meeting I made two relevant 18 observations. First, we should be keenly focused on the 19 details of the design of the any access fee pilot 20 program, and Commissioner Stein already mentioned what is 21 being included and being excluded. And I, too, am 22 looking forward to the discussion on that, in addition 23 including considering whether to include a zero-fee 24 bucket. 25 Since that meeting, I've heard from a number of 0009 1 market participants, as well as committee members 2 themselves, that no such category is necessary to achieve 3 meaningful results from the pilot. I look forward to the 4 discussion today on that topic and continued discussions 5 on that. 6 And I see the draft recommendations encourage 7 further public comment on this topic, which I believe is 8 quite sensible and I look forward to those comments. 9 Second, at the last meeting, I noted that the 10 discussions about the NMS planned governance coincide 11 with the Commission's consideration of the CAT NMS plan. 12 If the planned governance recommendation comes before the 13 Commission, I will assure you that I will definitely be 14 bearing in mind what we hear in both comment files. 15 As an aside, I should mention that the comment 16 period for the CAT NMS plan closes in, I believe, 10 days 17 on July 18. 18 In closing, thank you to the SEC Staff for your 19 work in support of the committee. Likewise, thank you to 20 everyone engaged with the subcommittees in advance of 21 these recommendations. And finally, thank you again to 22 the members of the committee. Keep sending us thoughtful 23 recommendations to ensure that enhancing our equity 24 market structure remains a top priority on the 25 Commission's agenda. 0010 1 Thank you. 2 MR. LUPARELLO: Thank you, Kara. Thank you, 3 Mike. 4 I'd introduce the TM staff. I'd also note that 5 Mark Flannery, our chief economist, is also on. 6 Standard disclaimer applies to today's meeting. 7 Our views expressed in this forum are ours and cannot be 8 attributed to the Commission or the commissioners or the 9 body as a whole. 10 I thought before we got to substance, I would 11 do a little refresher on the subcommittee recommendation 12 process. 13 As you recall, at the October committee 14 meeting, the Commission Staff provided and presented a 15 memorandum on both maker-taker fees on equity exchanges 16 and the current regulatory model for trading venues and 17 market data dissemination. In addition to the 18 presentations, during the meeting, the Commission invited 19 several industry participants to participate on an expert 20 panel to discuss their views on the issues, which were 21 followed by a robust discussion among the panelists, 22 committee members, the Chair, commissioners and 23 Commission staff. 24 Since that meeting, both the NMS and Trading 25 Venues Regulation Subcommittees have had several meetings 0011 1 and proactively solicited participation and consultation 2 from various types of market participants, including 3 those not directly participating in the advisory 4 committee. These consultations are reflected in the 5 summary minutes of the subcommittee meetings, which are 6 public and posted on the committee website, and have 7 factored into the subcommittee's initial recommendations. 8 The subcommittee's initial recommendations were 9 publicly posted prior to and presented to the full 10 committee for consideration at the recent April advisory 11 committee full meeting. Again, during the last meeting, 12 the Commission included an expert panel to discuss their 13 views on the subcommittee's recommendations. 14 In addition to views expressed by the expert 15 panel in the April meeting, the Commission has solicited 16 public comment on the recommendations and has received 17 several responses that have been shared with the 18 subcommittee and posted to the comment file. 19 Today, both the Reg NMS Subcommittee and the 20 Trading Venues Regulations Subcommittee will be 21 presenting their revised recommendations for full 22 committee consideration. And consistent with prior 23 practice, these revised recommendations were posted on 24 the committee website and publicly available prior to 25 today's meeting. 0012 1 So this afternoon, we'll start with the Reg NMS 2 Subcommittee's recommendation for an access fee pilot. 3 You should have all received a copy of the most recent 4 draft recommendation. And for those listening on the 5 webcast, the draft is available at www.sec.gov on the 6 advisory committee's webpage. 7 And with that very long lead-in, I will ask 8 Kevin Cronin, the chair of the Reg NMS Subcommittee, to 9 present the subcommittee's revised recommendation. 10 Kevin. 11 MR. CRONIN: Thanks, Steve. And thanks, Chair 12 White and Commissioners Stein and Piwowar, and the Staff 13 of the SEC as well. 14 We appreciate the opportunity to further the 15 recommendation that we have initially discussed on April 16 26, which is a pilot program on access fees, designed to 17 really get the data which we think should be leading the 18 conclusions on what should be done over time and become 19 more reliant on data and less reliant on sort of emotions 20 when it comes to these conversations. 21 So in that spirit and in that vein, I also want 22 to take the opportunity to say we really appreciate those 23 who are other participants on our committee, 24 subcommittee, who are not official members of our 25 subcommittee but have been invaluable participants. And 0013 1 their voices and their various representative places have 2 very good opinions. And we certainly appreciate them 3 sharing them. 4 So with that said, again, I think as I did last 5 time, I'm going to pass to Joe Mecane to go through this 6 in depth, because he actually did all the writeups and 7 should get the credit for the final product, at least as 8 it's written. 9 There's been a lot of further conversations 10 that went into this, as we took the feedback that we got 11 from the prior meeting and really tried to consider the 12 differing opinions on the access pilot. 13 And so with that, Joe, if you will summarize 14 the pilot and potentially highlight some of the 15 modifications and issues that we couldn't find consensus 16 on, I think that would be valuable for the discussion. 17 MR. MECANE: Sure. So -- thanks for that, 18 Kevin. 19 So what I will try to do is hit the highlights 20 of the major parameters of the program, as well as things 21 that changed last time. And I will specifically call out 22 the six or so items that we're suggesting should be 23 raised for specific industry pilot, should this go to a 24 formal proposal. And I will try to address the points 25 that Chair White and Commissioner Stein and Piwowar 0014 1 raised in the opening comments. And I'll encourage my 2 fellow subcommittee members to jump in if I miss 3 anything. 4 But from the last draft, we do still have the 5 same three suggested buckets of 20 cents, 10 cents and 2 6 cents. I'll come back to the 2 cent point in a second. 7 One detail that we do add is a suggested pilot 8 population of 100 stocks in each of those three buckets. 9 We've kept a market capitalization of above $3 billion 10 and suggest a stratified random sampling within each of 11 those buckets. 12 We've estimated the addressable universe of the 13 pilot to be about 800 stocks. So this would put 300 of 14 those in the -- in the pilot program. And 500 would be 15 in the control group. 16 There was discussion about whether the sample 17 size should be higher or lower. I wouldn't say we did a 18 rigorous scientific exercise around the hundred, but that 19 was our -- that was our consensus view coming out of it. 20 We've also added an implementation detail to 21 suggest that perhaps the initial rollout be for a shorter 22 period of time where, let's say, 10 stocks are part of 23 the pilot for the first three months. And then after 24 three months, we suggest that the full duration of the 25 pilot should run for two years. 0015 1 In the last draft, we had suggested either a 2 one- or two-year pilot. After further discussion, we 3 thought two years was the right time frame, because the 4 behavioral changes that we think that will result from 5 the pilot program will take -- will take some time to -- 6 will take some time to filter through the marketplace. 7 One change that we made from the former 8 outline, and this is a theme that we had talked about in 9 the last discussion, and we've tried to stay very 10 consistent with, is the idea of changing as limited of a 11 number of variables as possible, in trying to keep a very 12 straightforward pilot around access fees and not 13 introducing additional changes or additional variables 14 that may confuse the measurement of the results. 15 And so one thing that we had said in the last 16 proposal was that the access fee change should apply to 17 protected and nonprotected quotes. Upon further 18 discussion, while we had suggested that the change should 19 apply to both in the previous draft, largely because it 20 was, we believed, substantively consistent with how the 21 market had operated thus far, we decided that that would 22 be an additional change to Reg NMS that did not apply 23 today. And so in an effort to, again, limit the number 24 of changes and variables, we're suggesting that we keep 25 the access fee change specific to protected quotes, as 0016 1 applies today. 2 After additional discussion, we're also 3 recommending two points that we hadn't had a fully formed 4 opinion on. And those were items that the commissioners 5 had mentioned at the beginning of the discussion, around 6 inverted venues and ATSs. And we again without, I would 7 say, a uniform view among the subcommittee, did form a 8 compromise position that the pilot should not cover 9 inverted venues. And the reasoning, consistent with the 10 point I just made, was largely that applying the access 11 fee cap to inverted venues would be a change to the 12 current way that Rule 610 is applied, and the current 13 application of Rule 610. And the view was that -- the 14 view in favor of not including inverted venues argued 15 that the application of 610 or a similar rule to inverted 16 venues should be considered if there was a broader, 17 separate pilot around looking at inducements. Because 18 the pricing of inverted venues is largely designed to 19 compete with internalization and off-exchange trading. 20 And that would be the proper framework to construct a 21 pilot around inverted venue pricing. 22 We also, I think consistent with the last 23 conversation, finalized a recommendation after further 24 discussion that the access fee pilot should not apply to 25 ATSs. Again, similar logic, in that Rule 610 and the 0017 1 access fee pilot does not currently apply to ATSs. And 2 secondly, we believed that the implementation details of 3 applying an access fee cap to ATSs, given that most of 4 the commissions for ATSs take the form of institutional 5 commissions, which are discretionary and not under the 6 guise of an access fee cap currently, we thought would 7 overcomplicate the implementation details and draw in 8 additional factors that are currently not in place in the 9 way that the marketplace works today. 10 The last point that we added and fleshed out in 11 the outline is the point around monitoring. And 12 specifically, we suggest that the pilot should include 13 ongoing monitoring to terminate the program, if there 14 should be an unexpected significant deterioration in any 15 of the measurement criteria. We also suggest that 16 there's a framework of perhaps six-month reporting on the 17 parameters and results of the pilot so that there can be 18 public review of the progress of the pilot as it unfolds. 19 The last items I'll highlight are the six or so 20 items that we specifically call out for industry comment. 21 We did not have any items, again, that we didn't feel we 22 could get to a -- to a compromise position, so we don't 23 have any items that we are suggesting for a formal vote 24 among the committee itself. But we do think that, of 25 some of the compromise positions, there are a number that 0018 1 are worth, should this go out for a formal proposal, are 2 worth highlighting for industry feedback. 3 I've mentioned three of them and three of them 4 I haven't so far. But again, back to the 2 cent bucket, 5 which we also talked about in the last meeting, the 2 6 cent bucket was a compromise position. Again, 7 substantively, I think there was agreement that a 2 cent 8 bucket would substantively mirror what a no-rebate bucket 9 would do in practice. There was a view from some 10 members of the subcommittee that, you know, if nothing 11 else for optical and clarity reasons, we should still 12 have a -- 13 There was a view among others on the 14 subcommittee, especially from the exchange standpoint, 15 that going below a 2 cent bucket removed too much pricing 16 flexibility for exchanges. And so we decided as a group 17 to recommend a 2 cent bucket as the best path forward. 18 But again would suggest that that be open for industry 19 comment, should the industry have a stronger view in one 20 direction or the other. 21 The other two compromise positions or 22 discussion points that I mentioned around inverted venues 23 and ATSs, again, we made our suggestion but would also 24 encourage those be -- be brought to the industry to see 25 if there was a stronger view to go the other way with 0019 1 those two points. 2 A fourth item that we highlight for specific 3 industry comment, which we mentioned in the last 4 discussion, was around the options markets. Again, we 5 believe that there aren't any specific issues or concerns 6 that are raised for the options markets through these 7 parameters but would also encourage a public commentary 8 on that point. 9 The fifth item, consistent with our previous 10 conversation, was around trade-at. We did revisit after 11 some of the commentary from some of the panelists in the 12 last session the idea of including trade-at in this 13 pilot, and reached the same conclusion we had last time. 14 Which was that, without drawing a strong view on trade-at 15 itself, that this was not the place to conduct a trade-at 16 pilot. And trade-at draws a number of other market 17 structure related items into the conversation and, if 18 there's a -- if there's a further recommendation down the 19 road from the subcommittee or elsewhere to conduct a 20 pilot around segmentation or trade-at specifically, then 21 we think that that should be vetted at that point. But 22 we believed trade-at to be an extra variable that changes 23 a number of other factors besides just access fees in the 24 pilot. 25 And then the last point that we suggest for 0020 1 industry comment, which was also highlighted by 2 Commissioners Stein and Piwowar, was around ETFs. And 3 again, I would say this was a point that didn't have a 4 strong view out of the subcommittee. But we recommended 5 that the pilot be specific to stocks and not extend to 6 ETFs. The reasons that we did so were several. One is 7 being sensitive to the concept release that the SEC had 8 put out around ETFs and perhaps a view that changes to 9 the ETF marketplace, because ETFs are a different 10 instrument than stocks, should be considered as part of 11 that. 12 Second, in the 3 billion and over category, we 13 recognize that there are, you know, a fewer 14 representative number of ETFs within that category. And 15 so that was the second reason we didn't include ETFs. 16 And then finally, we're also sensitive to the 17 fact that ETFs specifically were being discussed as part 18 of the market quality subcommittee and thought that if 19 there was to be any recommendations or considerations 20 around ETFs specifically, that those should potentially 21 be -- be viewed more holistically than just with regards 22 to access fees. 23 But again, I would say that was a point that we 24 didn't have a very strong view on, so we added that to 25 the list of items that we would suggest there be specific 0021 1 industry comment on. 2 So I will stop there and, again, encourage any 3 of my subcommittee members to add anything I may have 4 missed. And I think we would encourage any comments or 5 questions from there. 6 MR. LUPARELLO: Thank you, Kevin. And thank 7 you, Jo. 8 We'll open it up to questions or comments or 9 observations. Again, I would ask you to identify 10 yourself before speaking. And if we have folks talking 11 over each other, we will try to do our best to manage it. 12 MR. NAZARALI: Hey, Joe, or the committee. 13 Thanks for that. It's Jamil Nazarali here. 14 I have a question. You outlined in your 15 proposal that, before implementing the 100-stock pilot, 16 you would have a three-month data collection period, 17 where you would roll out 10 stocks in each bucket. That 18 seems to make a lot of sense. 19 What would you measure and how would -- what 20 would be the predetermined criteria to say, okay, this is 21 actually causing more damage, or this is great, we should 22 continue? 23 MR. MECANE: I'll start and encourage others to 24 jump in. 25 You know, there is a list of measurement 0022 1 criteria that we've laid out in the proposal of items 2 that we think should be measured. The list was largely 3 the same from the last meeting to -- to this meeting. 4 But the way that I think we're thinking about it, and 5 again this would need to get fleshed out, would be that 6 we would look to have every six-month reporting on the 7 metrics that we were suggesting. 8 The idea of the initial rollout for the first 9 three months, I think, was more intended to make things 10 operationally smoother, and not necessarily to look for 11 specific hurdles or specific metrics, but more to just 12 give the industry time to adjust to the changes with a 13 smaller population of stocks before going to the whole 14 universe. So I think we would expect that there would 15 be, you know, general monitoring but we weren't 16 necessarily tying the three-month, 10-stock pilot to the 17 full list of operating metrics. 18 MR. NAZARALI: So it's really just -- just a 19 roll-out plan, not really a, you know, 10 stocks for the 20 measurement period? 21 MR. MECANE: Again, I think it's open to 22 commentary, but that's how we were -- we were suggesting 23 it. 24 MR. NAZARALI: So I'll just change my question 25 to a comment. I think it would actually be very helpful, 0023 1 because we feel like capping access fees is going to 2 discourage liquidity provision and increase spreads, and 3 to have a period where you can look at that for three 4 months and see if that's happening and decide, hey, you 5 know, it does make sense to move forward, would actually 6 be something that would be beneficial. 7 MR. MECANE: Yeah, I think it's a fair comment. 8 I'd say the only other consideration is how long does it 9 take for the market to normalize for whatever changes we 10 put in place. Meaning we went around on that general 11 point to some extent because, you know, on the one hand, 12 we've had a 10-ish year period of behavior evolving as a 13 result of the current access fee structure. At the same 14 time, you know, and that's part of why we recommended the 15 two-year duration, just thinking that it's probably going 16 to take some time before we really know what impact 17 things have. 18 But certainly, the idea of just making sure 19 there's not an extreme unintended consequence in the 20 initial duration of the pilot makes sense. 21 MS. O'HARA: I would add -- this is Maureen 22 O'Hara. 23 I would also urge a little care here, in the 24 sense that a 10-stock, you know, sample, I'm not sure if 25 you mean 10 stocks total or if you mean 10 in each of the 0024 1 buckets. 2 MR. MECANE: Ten in each of the buckets would 3 be -- 4 MS. O'HARA: Yeah. Because otherwise, I think 5 you have to be a little leery of too small a sample. But 6 if you basically have 10 in each of the buckets, that 7 should be large enough to allow some comfort that you're 8 picking up things that are just not idiosyncratic. 9 MR. MECANE: Makes sense. 10 MR. KETCHUM: Joe, this is Rick. When you talk 11 about -- you set down very logical market quality 12 indicators from the standpoint of looking both to 13 evaluate the pilot and also, I assume, as the primary 14 indicators or possible unintended consequences that might 15 result in the Commission truncating the pilot. 16 Did the committee view that there were other 17 unintended consequences to be reviewed if there were 18 significant market share away from exchanges to 19 exchanges, from ATSs to firms trading away from ATSs, et 20 cetera? Or was the view that decisions to truncate the 21 pilot and analysis of the pilot should be fundamentally 22 based on the market quality pieces you have there? 23 MR. MECANE: Yeah, I would say, you know, just 24 -- just commenting on the measurement criteria briefly, 25 you know, we have in the list the usual, predictable 0025 1 measurements of spreads and, you know, volatility. But 2 we also have, as some of the measurement criteria, the 3 proportions of on- and off-exchange market share, any 4 behavioral routing changes that we see as evidenced by 5 market share shifts, on- and off-exchange trading levels, 6 TRF versus ATS levels, the amount of price improvement in 7 the market. 8 We also have commentary around any change in 9 retail or institutional pricing in the markets. Some of 10 those are, you know, probably warrant a little more 11 detail on how we would measure them. But we are -- we do 12 highlight that behavioral changes are something that we 13 think should be monitored closely as part of the -- as 14 part of the pilot. 15 MR. LUPARELLO: Hey, Joe, it's Steve. I just 16 have one clarifying question and then I'll let it go for 17 a second for anybody else who wants to comment. 18 On the routing changes, you say TRF versus 19 internalization. Is that basically just ATS, off 20 exchange, versus non-ATS off-exchange? 21 MR. MECANE: Yeah, I think we probably could 22 have worded that better. But yes, that's -- 23 MR. LUPARELLO: Not at all, I just wanted to 24 make sure. 25 MR. MECANE: Yeah. 0026 1 MR. LUPARELLO: Great. Any other questions or 2 comments? 3 MR. NAZARALI: Sorry, Jamil again. 4 I'm not sure it makes sense to exclude the 5 ETFs. I understand your rationale for doing that, but if 6 we are to do it, it seems to me that -- and, yes, there 7 are fewer ETFs that fall into the above 3 billion bucket. 8 But there doesn't seem to be a really strong reason not 9 to do it, to include ETFs. 10 MR. MECANE: Yeah, like I said, I wouldn't say 11 that was something we -- anyone really felt strongly 12 about. We kind of went that way for the reasons I 13 outlined. But I think it wasn't a -- it wasn't a strong 14 view. So again, that's part of why we threw it on the 15 list for consideration. 16 But if there was a view from the full committee 17 to include them -- I don't want to speak for the full 18 subcommittee, but I don't think that that's something 19 that would get a lot of -- of reaction. 20 MR. ANDRESEN: This is Matt Andresen -- 21 MR. NAZARALI: -- part of the vote, we could 22 say we support it and should we include ETFs. 23 MR. ANDRESEN: Yeah, this is Matt Andresen. 24 I would second Jamil's point. I think, given 25 there may be a smaller number of ETFs over the 3 billion, 0027 1 there are a lot of highly relevant ones from a trading 2 volume perspective and a retail interest perspective, so 3 I think it would be worthwhile. 4 MR. BROWNE: This is Reggie Browne. I would 5 concur on that sentiment. I think we could find 10 6 relevant, highly traded ETFs to measure any effects to 7 access fees and see if there's an outcome to be achieved 8 from measuring the outcome of the change. 9 MR. LUPARELLO: So Kevin and Joe, if you're 10 comfortable modifying the subcommittee's recommendation 11 to include ETFs, then I can certainly call for the vote 12 with that change? 13 MR. CRONIN: Yeah, I'm comfortable. That was 14 really not a point of high contention whatsoever. 15 MR. LUPARELLO: And I guess we'll find if your 16 subcommittee members suddenly vote no, then maybe -- 17 MR. CRONIN: That's right. 18 MR. LUPARELLO: -- we got a little over our 19 skis, but I think we'll probably be okay. 20 Any more comments before we go to the vote? 21 (No response.) 22 MR. LUPARELLO: Good. Hearing none, Matt 23 Andresen? 24 MR. ANDRESEN: Yes. 25 MR. LUPARELLO: Reggie? 0028 1 MR. BROWNE: Yes. 2 MR. LUPARELLO: Kevin Cronin? 3 MR. CRONIN: As you might expect, yes. 4 MR. LUPARELLO: Brad? 5 MR. KATSUYAMA: Yes. 6 MR. LUPARELLO: Rick Ketchum? 7 MR. KETCHUM: Yes. 8 MR. LUPARELLO: Manisha? 9 MS. KIMMEL: Yes. 10 MR. LUPARELLO: Meht? 11 MR. KINAK: Yes. 12 MR. LUPARELLO: Andy Lo? 13 MR. LO: Yes. 14 MR. LUPARELLO: Andy? 15 MR. LO: Yes. 16 MR. LUPARELLO: Okay, thanks. 17 Joe Mecane? 18 MR. MECANE: Yes. 19 MR. LUPARELLO: Jamil? 20 MR. NAZARALI: No. 21 MR. LUPARELLO: Eric Noll? 22 MR. NOLL: Yes. 23 MR. LUPARELLO: Maureen? 24 MS. O'HARA: Yes. 25 MR. LUPARELLO: Joe Ratterman? 0029 1 MR. RATTERMAN: Yes. 2 MR. LUPARELLO: Nancy Smith? 3 MS. SMITH: Yes. 4 MR. LUPARELLO: Chester Spatt? 5 MR. SPATT: Yes. 6 MR. LUPARELLO: And Gary Stone? 7 MR. STONE: Yes. 8 MR. LUPARELLO: So my count was 15 in favor, 9 one opposed and one not voting. Is that -- 10 So I think with that, the committee has made 11 the recommendation to the Staff, and we take it with the 12 thanks for all the hard and thoughtful work that went 13 into it. 14 At this point, let's turn to the next agenda 15 item, which is the Trading Venue Regulation 16 Subcommittee's recommendations. 17 Again, for those listening on the webcast, the 18 most recent draft recommendation is available at sec.gov 19 on the advisory committee's webpage. 20 And I will ask Rick Ketchum, as the chair of 21 the subcommittee, to present the subcommittee's revised 22 recommendations. 23 MR. KETCHUM: Thank you, Steve. And I want as 24 well to thank my members of the subcommittee for all 25 their work and close analysis here. 0030 1 I'll try to be relatively brief since, as you 2 know, these have been published. And, as the committee 3 can see, the changes from our initial proposals on the 4 two recommendations we're moving forward to the committee 5 today are relatively -- relatively minor in response to 6 the comments we received at the last meeting. 7 Just to remind you, the Trading Venue 8 Subcommittee was formed to consider whether the current 9 regulatory model for trading venues is optimally serving 10 the market as a whole and providing a level playing field 11 for all market participants. And at the April MSAC 12 meeting, we discussed this subcommittee's four 13 preliminary recommendations. 14 Based on the input from the committee as well 15 as the panel, and comments we've reviewed and discussions 16 with the Commission Staff, the subcommittee determined 17 that it was appropriate to prioritize the two 18 recommendations that are before the MSAC today. We'll 19 continue to work on the other two recommendations, as 20 well as recognizing that there remain other areas with 21 regard to our subject matter responsibilities were we 22 want to do further analysis going forward. 23 So the summary of the recommendations are 24 fairly straightforward. The two recommendations 25 submitted are intended to provide for improved industry 0031 1 participation in certain SRO regulatory matters. 2 The first recommendation suggests changes to 3 NMS plan governance, to expand the role of the NMS plan 4 advisory committees and to make them more uniform. 5 Specifically, the recommendation suggests the Commission 6 engaged in formal administrative rulemaking that would 7 require NMS plans to clarify the process for electing -- 8 for selecting advisory committee representatives. And 9 including within that recommendation a provision that, 10 once the advisory committee had been established and was 11 operational, that the advisory committee would have the 12 authority to nominate its own replacement candidates. 13 It also proposed to expand and formalize the 14 role of the advisory committee by providing the advisory 15 committee with a mechanism to vote on plan matters and to 16 have its vote formally addressed by the NMS plan 17 operating committee. 18 The recommendation also would be to 19 significantly narrow the use of executive sessions by NMS 20 plan participants, an item that had been a particular 21 note of concern that the subcommittee heard with regard 22 to industry participants and advisory committees. And 23 the narrowing is such that executive committees would be 24 reserved for matters that present a clear conflict for 25 advisory committee members or that involve potential or 0032 1 ongoing litigation between advisory committee members and 2 NMS plan participants. 3 In addition, we propose to allow for the 4 formation of working groups made up of a subcommittee of 5 the operating committee, but only in limited situations 6 to resolve a particular issue and the working group must 7 regularly provide updates to the full committee. 8 We also propose to eliminate NMS plan 9 provisions that require unanimous votes, instead creating 10 a default whereby substantive plan changes, plan 11 amendments and fees would be subject to a two-thirds 12 supermajority vote. And administrative or technical 13 matters should be subject to a simple majority vote. 14 And finally, to change the allocation of voting 15 rights among SROs to better account for grouping of SRO 16 licenses and relative market share. And that 17 recommendation stays exactly the same as it was the first 18 time around. 19 To Commissioner Stein's question of 20 alternatives that we did consider, we did look and were 21 cognizant of both the concerns raised by exchanges -- and 22 I would note, exchanges and FINRA -- a recognition that 23 the exchanges and FINRA participating in the plans have 24 made substantial efforts already to provide outreach to 25 industry advisory committees and nothing in these 0033 1 recommendations should be viewed as criticism of those 2 significant outreach efforts. But we do believe they 3 need to be regularized and more consistent. And we think 4 these -- these recommendations would help do that and 5 would help assure the transparency of the process and 6 participation, and clear responsiveness of the plan 7 participants to recommendations and responses made by the 8 advisory committee. 9 We also considered the possibility in the 10 recommendations by Brett Redfearn from JP Morgan at the 11 panel discussion that there should be voting members of 12 the plan itself that would be industry participants. And 13 we recognized that -- the argument for the value of that. 14 However, we thought that, I think, the concern was -- and 15 the committee decided not to move ahead with that 16 recommendation now, first in recognition that that vote 17 would be largely Pyrrhic, given the number of votes that 18 the exchange participants would have. But more so in 19 recognition of some of the arguments made by exchanges in 20 their comment letters that Section 11A of the Exchange 21 Act and Rule 608 of Reg NMS focused entirely on enabling 22 SROs to become official voting members and participants 23 in NMS plans. 24 So without expressing a view one way or not of 25 the flexibility the Commission might have to go beyond 0034 1 those specific references in Rule 608 at the present 2 time, we felt that this process would provide 3 substantially more consistent and effective input from 4 the industry. 5 The second recommendation that we are moving 6 forward at this time suggests that the Commission or 7 Commission Staff issue guidance to advise SROs that they 8 should, as a matter of practice, satisfy existing rule 9 filing requirements by linking their implementation time 10 line for proposed rule changes to the publication of 11 technical specifications or FAQs as applicable. The 12 point of this recommendation is to encourage a best 13 practice for SROs in the SEC, as applicable, to publish 14 draft technical specifications for public proposed rule 15 changes before the SEC approves the changes, to provide 16 the industry an opportunity to review and comment on the 17 draft tech specs and link implementation dates to the 18 final publication of technical specifications or FAQs, 19 again, in reflection of the points made by commentators 20 off of the initial recommendations. 21 This is not to suggest that there hasn't been 22 substantial effort by plan participants in this area 23 already, as well as by SROs, to both work closely with 24 industry trade associations and also to put out technical 25 specifications in a wide range of situations. But we 0035 1 believe the clear articulation by the Commission of a 2 best practice would create a level of consistency and 3 expectation with regard to this that we think would be 4 valuable. 5 With respect to the two recommendations up for 6 vote today, the subcommittee made a few relatively minor 7 modifications, I mentioned, from what was presented in 8 April. In the NMS plan recommendation, the subcommittee 9 added a condition on the formation of working groups, 10 such that they must be limited to no more than half of 11 the total number of votes in the operating committee, to 12 ensure the working groups are not essentially used as a 13 substitute for the operating committee and are, instead, 14 used for their intended function. 15 In the rule change implementation 16 recommendation, the subcommittee added a footnote to 17 clarify the subcommittee's recognition of the 18 recommendations' intent that it is to -- the intent is to 19 encourage the publication of tech specs in as much detail 20 as possible with as much time for industry review and 21 input as possible to achieve feasible and appropriate 22 implementation time frames. But also, as a footnote, 23 recognizes that that may not be possible in limited 24 circumstances. But in those limited circumstances, there 25 should be a clear articulation by either the plan 0036 1 participants, exchanges or, obviously, SEC gets to make 2 its own decision on articulation, but we suggest as well 3 from the Commission, so that we hold ourselves to a high 4 standard for the -- to implement the best practice 5 whenever possible. 6 I will stop there, invite the other members of 7 my subcommittee to provide additional context that I may 8 have missed, and then glad to respond to questions or 9 comments from either the Commission or committee members. 10 MR. RATTERMAN: This is Joe. Thank you, Rick. 11 Well articulated. We're in support of pretty much 12 everything that Rick has laid out. 13 I just want to reemphasize one of the points 14 that Rick ended with, which was -- maybe provide a little 15 bit more context, I think, oftentimes as opposed to 16 limited circumstances. Rule filings and technical specs 17 are -- are sequential and can't be -- can't be done in 18 parallel. So, you know, the number of times that this 19 happens, I think, would -- you know, will be seen. I 20 just want to point out that we think that it happens more 21 often than not that the rule filing is done and then the 22 technical specs will come after. And having technical 23 specs out while there's a rule filing being reviewed is 24 just logistically challenging most of the time, or at 25 least a significant amount of time, as opposed to maybe 0037 1 in limited circumstances. 2 So just the logistics of what the SEC reviews 3 and what they approve and what's part of that filing and 4 approval, versus the technical specs, which oftentimes, 5 by necessity, come afterwards. So we're definitely very 6 supportive of giving the industry, you know, a 7 significant amount of time to review technical specs and 8 have implementations be, you know, tagged to some number 9 of months or weeks or whatever the case may be after 10 technical specs are completed. I just want to highlight 11 that it may not be practical often to have technical 12 specs published in parallel to a review of a -- of a rule 13 being up for approval. 14 MR. LUPARELLO: Thanks, Rick. And thanks, Joe. 15 Rick, if it's okay with you, I'm going to 16 suggest that we actually bifurcate the two and have a 17 conversation and then a vote on your first 18 recommendation, and then a conversation and vote on the 19 second recommendation. 20 MR. KETCHUM: Certainly, I think that makes 21 great sense. 22 MR. LUPARELLO: Great. With t as the lead-in, 23 I would open it up on the NMS governance recommendations, 24 comments, questions or other observations. 25 MR. NAZARALI: Hi, this is Jamil. 0038 1 I have a question about the allocation of 2 voting rights among SROs. So there's a proposal in here 3 to do one vote per exchange registration. And then if an 4 exchange has more than 10 percent, give them two. 5 This seems to give a lot -- I think a lot of 6 influence to some of the really small exchanges. And I 7 know there's a proposal to maybe even cap that. But did 8 you guys think about anything where it would be based on 9 market share or some other relevant metric, rather than 10 this, you know, very blunt instrument of saying, okay, 11 one per exchange group, step function if it's more than 12 10, and then a cutoff if it's less than a certain amount? 13 MR. KETCHUM: It's a fair question. I think 14 that was the reason for the proposal on the second vote, 15 that would look at market share factors from that 16 standpoint, to provide increased input from the 17 standpoint of exchanges that were a larger part of the 18 market. 19 I think it was pretty much to your point, 20 Jamil, and certainly we can talk about whether the 2X is 21 the correct number versus whatever. I don't think -- 22 that was not an item that was debated in great detail by 23 the subcommittee. But I think the concern was that 24 keying off the number of votes based on business model 25 decisions from the standpoint of competition with regard 0039 1 to registrations seemed often based on pricing and 2 perhaps a couple other things but relatively little, 3 seemed also not to be a perfect way to provide and 4 address the balance of power. 5 So the intent was definitely to provide a 6 recognition of the significance of exchanges that had a 7 greater market share. And as I say, I don't think -- 8 certainly, we would be open to discussion as to whether 9 2X is the right number. But I think, in my own mind, it 10 would be. 11 MR. LUPARELLO: Other comments on the -- on the 12 first recommendation, on the amendment to governance 13 recommendation? 14 (No response.) 15 MR. LUPARELLO: Great. Then let me go to a 16 roll call vote. 17 I'm sorry. Was there another comment? 18 (No response.) 19 MR. LUPARELLO: Matt Andresen? 20 MR. ANDRESEN: Yes. 21 MR. LUPARELLO: Reggie Browne? 22 MR. BROWNE: Yes. 23 MR. LUPARELLO: Kevin Cronin? 24 MR. CRONIN: Yes. 25 MR. LUPARELLO: Brad Katsuyama? 0040 1 MR. KATSUYAMA: Yes. 2 MR. LUPARELLO: Rick Ketchum? I think we know. 3 MR. KETCHUM: Yes. 4 MR. LUPARELLO: Manisha Kimmel? 5 MS. KIMMEL: Yes. 6 MR. LUPARELLO: Meht Kinak? 7 MR. KINAK: Yes. 8 MR. LUPARELLO: Andy Lo? 9 MR. LO: Yes. 10 MR. LUPARELLO: Joe Mecane? 11 MR. MECANE: Yes. 12 MR. LUPARELLO: Jamil Nazarali? 13 MR. NAZARALI: Yes -- not be the sole 14 dissenter. 15 (Laughter.) 16 MR. LUPARELLO: Eric Noll? 17 MR. NOLL: Yes. 18 MR. LUPARELLO: Maureen O'Hara? 19 MS. O'HARA: Yes. 20 MR. LUPARELLO: Joe Ratterman? 21 MR. RATTERMAN: Yes. 22 MR. LUPARELLO: Nancy Smith? 23 MS. SMITH: Yes. 24 MR. LUPARELLO: Chester Spatt? 25 MR. SPATT: Yes. 0041 1 MR. LUPARELLO: Gary Stone? 2 MR. STONE: Yes. 3 MR. LUPARELLO: Maybe on the next one, I'll go 4 in reverse alphabetical order, Gary, so you don't have to 5 go last. 6 So that's great. Thank you. And the Staff and 7 the Commission received the committee's recommendation 8 and look forward to acting on it. 9 I would now open it up to comments or questions 10 regarding the -- let's call it the FAQ tech spec 11 recommendation. 12 MS. KIMMEL: I just want to comment on Joe's 13 comment. I think the biggest issue with respect to this 14 recommendation is the linking of the implementation time 15 to the specifications. I also think this is, you know, 16 critical for the CAT NMS plan as we look forward to that, 17 as well. 18 Manisha, by the way. 19 MR. LUPARELLO: Thank you, Manisha. 20 Any other comments? 21 (No response.) 22 MR. LUPARELLO: Very good. 23 Well, I was kidding about reverse alphabetical 24 order, so we will go in the same order. 25 For the recommendation regarding FAQs and tech 0042 1 specs, Matt Andresen? 2 MR. ANDRESEN: Yes. 3 MR. LUPARELLO: Reggie Browne? 4 MR. BROWNE: Yes. 5 MR. LUPARELLO: Kevin Cronin? 6 MR. CRONIN: Yes. 7 MR. LUPARELLO: Brad Katsuyama? 8 MR. KATSUYAMA: Yes. 9 MR. LUPARELLO: Rick Ketchum? 10 MR. KETCHUM: Yes. 11 MR. LUPARELLO: Manisha Kimmel? 12 MS. KIMMEL: Yes. 13 MR. LUPARELLO: Meht Kinak? 14 MR. KINAK: Yes. 15 MR. LUPARELLO: Andrew Lo? 16 MR. LO: Yes. 17 MR. LUPARELLO: Joe Mecane? 18 MR. MECANE: Yes. 19 MR. LUPARELLO: Jamil Nazarali? 20 MR. NAZARALI: Yes. 21 MR. LUPARELLO: Eric Noll? 22 MR. NOLL: Yes. 23 MR. LUPARELLO: Maureen O'Hara? 24 MS. O'HARA: Yes. 25 MR. LUPARELLO: Joe Ratterman? 0043 1 MR. RATTERMAN: Yes. 2 MR. LUPARELLO: Nancy Smith? 3 MS. SMITH: Yes. 4 MR. LUPARELLO: Chester Spatt? 5 MR. SPATT: Yes. 6 MR. LUPARELLO: And Gary Stone? 7 MR. STONE: Yes. 8 MR. LUPARELLO: Great. I'll turn it back over 9 to Chair White for a couple of comments before we wrap 10 up. 11 CHAIR WHITE: Yeah, let me just thank the 12 committee, the subcommittees, especially Kevin and Rick 13 as the head of the subcommittees, for their 14 recommendations. Obviously, you know, lots of hard work, 15 very helpful and very thoughtful recommendation. I guess 16 the next step at our end will be for the Commission Staff 17 to promptly consider these recommendations, including 18 what proposals should be made to the Commission in these 19 areas. 20 I guess I would reiterate something I have, 21 since really the beginning of the committee, that 22 throughout this process, I strongly encourage all 23 interested parties to continue to share their 24 perspectives and expertise with the Commission and Staff. 25 But again, thank you very much for your tremendous work. 0044 1 MR. LUPARELLO: And let me add thanks on behalf 2 of the Staff for the thoughtful, detailed work. 3 The next full committee meeting is August 2 at 4 the Commission's headquarters in Washington, D.C. During 5 that meeting, we anticipate a presentation of potential 6 recommendations from the Customer Issues Subcommittee and 7 the Market Quality Subcommittee. And consistent with 8 prior meetings, the agenda will also reflect the 9 discussion of the recommendations by expert panels. 10 And so, with that, I appreciate the 11 participation today. I will not do a roll call vote for 12 whether we can adjourn. I will ask for a motion and a 13 second. 14 PARTICIPANT: So moved. 15 MS. SMITH: Second. 16 MR. LUPARELLO: And I will assume unanimity, 17 and we look forward to seeing you in August. 18 Thanks, everybody. 19 (Whereupon, at 2:56 p.m., the committee was 20 adjourned.) 21 * * * * * 22 23 24 25 0045 1 PROOFREADER'S CERTIFICATE 2 3 In The Matter of: EQUITY MARKET STRUCTURE ADVISORY 4 COMMITTEE MEETING 5 File Number: OS-0708 6 Date: July 8, 2016 7 Location: Washington, D.C. 8 9 This is to certify that I, Nicholas J. Wagner, 10 (the undersigned), do hereby swear and affirm that the 11 attached proceedings before the U.S. Securities and 12 Exchange Commission were held according to the record and 13 that this is the original, complete, true and accurate 14 transcript that has been compared to the reporting or 15 recording accomplished at the hearing. 16 17 _______________________ _______________________ 18 (Proofreader's Name) (Date) 19 20 21 22 23 24 25