0001 1 U.S. SECURITIES AND EXCHANGE COMMISSION 2 3 4 5 6 EQUITY MARKET STRUCTURE 7 ADVISORY COMMITTEE MEETING 8 9 10 11 Tuesday, November 29, 2016 12 9:30 a.m. 13 14 15 16 17 18 19 20 21 U.S. Securities and Exchange Commission 22 100 F Street, N.E. 23 Washington, D.C. 20549 24 25 AMENDED 12-20-2016 0002 1 PARTICIPANTS: 2 3 SEC COMMISSIONERS PRESENT: 4 Mary Jo White, Chairman 5 Kara M. Stein 6 Michael S. Piwowar 7 8 EQUITY MARKET STRUCTURE ADVISORY COMMITTEE MEMBERS PRESENT: 9 Matthew Andresen 10 Headlands Technologies LLC 11 Reginald Browne 12 Cantor Fitzgerald & Co. 13 Kevin Cronin 14 Invesco Ltd. 15 Brad Katsuyama 16 IEX Group Inc. 17 Ted Kaufman 18 Duke University Law School and former U.S. Senator 19 from Delaware 20 Richard Ketchum 21 Former Chairman and CEO, FINRA 22 Manisha Kimmel 23 Thomson Reuters 24 Mehmet Kinak 25 T. Rowe Price Group 0003 1 PARTICIPANTS(CONT.): 2 3 EQUITY MARKET STRUCTURE ADVISORY COMMITTEE MEMBERS 4 PRESENT(CONT.): 5 Joseph Mecane 6 Barclays PLC 7 Jamil Nazarali 8 Citadel Securities, LLC 9 Eric Noll 10 Convergex Group 11 Maureen O'Hara 12 Cornell University 13 Joe Ratterman (by telephone) 14 BATS Global Markets, Inc. 15 Nancy Smith 16 AARP Inc. 17 Chester Spatt 18 Carnegie Mellon University 19 Gary Stone 20 Bloomberg Tradebook LLC 21 22 23 24 25 0004 1 C O N T E N T S 2 PAGE 3 Welcome Remarks by Chair White, Commissioners, and 4 Director of Trading and Markets, Steve Luparello 5 5 Market Quality Subcommittee Recommendations to the 6 Committee 12 7 Consideration and Discussion of Recommendations 8 Relating to Market Quality 19 9 Customer Issues Subcommittee 1st rec. to the 10 Committee 38 11 Consideration and Discussion of Recommendation 1 12 Relating to Customer Issues 39 13 Customer Issues Subcommittee 2nd rec. to the 14 Committee 55 15 Consideration and Discussion of Recommendation 2 16 Relating to Customer Issues 60 17 Regulation NMS Subcommittee Status Report to the 18 Committee 69 19 Trading Venues Regulation Subcommittee Status Report 20 to the Committee 70 21 Discussion of Next Steps 71 22 Adjournment 72 23 24 25 0005 1 P R O C E E D I N G S 2 MR. LUPARELLO: Good morning. Thank you for joining us at 3 today's meeting of the SEC's Equity Market Structure Advisory 4 Committee. I see that we have a majority of members in 5 attendance and have a quorum, and I'll call the meeting to 6 order. One quick check: I think Joe Ratterman is on the phone. 7 Joe, can you hear me? 8 MR. RATTERMAN: Yes, I can. 9 MR. LUPARELLO: Very good. And I think Professor Lo is 10 not in attendance this morning, but everybody else is here. And 11 so, like I said, I'll call the meeting to order. 12 And I will start by asking the Chair to make her opening 13 remarks. 14 CHAIR WHITE: Thank you very much, Steve, and good 15 morning, and welcome, everyone. I think I've seen and at least 16 shaken each of your hands this morning, so it's great to see you 17 here. 18 The full Committee will consider today several revised 19 recommendations from the Market Quality and Customer Issues 20 Subcommittees, including on issues related to market-wide 21 volatility, moderators, and broker-dealer order handling 22 transparency. 23 An earlier version of these recommendations was presented 24 at the Committee's meeting on August 2nd. At that time I gave 25 detailed remarks on most of the subjects actually to be covered 0006 1 today, and the Committee engaged in a thorough discussion, with 2 the participation of expert panelists. So I will not repeat my 3 remarks today, but I do look forward to the full Committee's 4 consideration of the revised recommendations. 5 In just a moment I'll turn to Steve Luparello to introduce 6 these items. But first, I would like to take this opportunity 7 to very briefly reflect on this Committee's work during its 8 nearly, I guess, two-year term now, which was scheduled to 9 expire in February 2017. 10 As I arrived at the SEC in early 2013, it was clear that 11 equity market structure, including a comprehensive review of the 12 current regulatory regime, must be a top and ongoing priority 13 for the Commission. And establishment of this federal advisory 14 Committee was a critical component of that effort, and the 15 determination to have maximum useful input on the range of 16 issues that are necessary for us to review, consider, and 17 reconsider. 18 As reflected in its broad-based charter, this Committee 19 was formed to provide diverse and comprehensive perspectives on 20 the structure and operations of the U.S. equity markets, as well 21 as advice and recommendations on equity market structure issues. 22 23 The members of this Committee set about very productively 24 and knowledgeably performing that important function, and 25 continued to tackle the core equity market structure questions. 0007 1 Including those actually taken up today, the Committee will have 2 considered substantial recommendations from each of the four 3 Subcommittees. 4 Through the efforts of the Reg NMS Subcommittee, the full 5 Committee has thus far already considered critical aspects of 6 Reg NMS and provided the Commission with a framework for an 7 access fee pilot that could further inform future Reg NMS policy 8 choices. The Staff is actively working on its advice and 9 recommendations to the Commission on your recommendation. 10 With the assistance of the Trading Venues Regulation 11 Subcommittee, the Committee has reviewed, among other things, 12 the current NMS governance framework, with a focus on striking a 13 balance between the needs of NMS plan participants and members 14 of NMS plan advisory Committees. 15 The Customer Issues Subcommittee has led efforts aimed at 16 promoting the Commission's understanding of investor confidence 17 and enhanced transparency for investors regarding broker-dealer 18 order handling practices. 19 And the Market Quality Subcommittee has initially focused 20 on refining critical market-wide mechanisms that protect our 21 markets against extraordinary volatility. We'll hear further 22 from both of these latter two Subcommittees today. 23 The full Committee's work and recommendations have been 24 and will continue to be invaluable to the Commission as we seek 25 to optimize our equity market structure. 0008 1 As we begin the transition process to new leadership at 2 the Commission and to having a full Commission, we need to 3 ensure continuity of all of the agency's many functions and 4 responsibilities -- to protect investors; promote fair, 5 ordinarily, and efficient markets; and facilitate capital 6 formation. As we do so, no one questions that equity market 7 structure will continue to be a major focus for the Commission, 8 or the value of this Committee's contributions. 9 Yesterday the Commission unanimously voted to renew this 10 Committee's charter for six months, with the current membership. 11 This renewal enables the next Chair and the Commission to 12 benefit seamlessly from this vital resource for our ongoing 13 assessment of equity market structure issues and potential 14 changes and enhancements. 15 I want to thank each of you again for your continued 16 willingness to serve on the Committee, which the Staff has 17 recently confirmed, and for your deduction to both the work of 18 the Committee and the mission of the SEC. 19 Before I turn the meeting over to Steve again to introduce 20 the agenda items and to hear from my fellow Commissioners, I 21 want to say a couple of words about Steve and my gratitude for 22 his service as our director of Trading and Markets. I didn't 23 warn him, actually. 24 And while I won't repeat all of the nice things I said 25 about him in the press release announcing his departure by the 0009 1 first of the year, I do want the public generally to know what 2 this Committee and market participants who've dealt with Steve 3 know well, and that is that investors in our markets have been 4 extraordinarily well served by Steve's knowledgeable and steady 5 hand and as the leader of the Commission's efforts to enhance 6 our equity market structure. 7 In addition to being the lead Commission advisor for this 8 Committee, Steve has also been a thought leader on critical 9 policy initiatives, including Regulation SCI, the national 10 market system plan to create a consolidated audit trail, and the 11 proposed enhancement to the regulation and transparency of ATSs 12 and disclosures to investors concerning broker-dealer order 13 handling practices. 14 Needless to say, Steve continues to be a tremendous asset 15 to the Commission and its mission, and he will be sorely missed 16 when he leaves. Thank you, Steve. 17 MR. LUPARELLO: I'm looking at the script. There's no 18 time for rebuttal. But -- 19 CHAIR WHITE: Try not to blow it now. 20 (Laughter.) 21 MR. LUPARELLO: Thank you very much for those kind words. 22 I'll invite Commissioner Piwowar to make his opening 23 remarks, which could also include rebuttal, but -- 24 COMMISSIONER PIWOWAR: Oh, I have a rebuttal. 25 (Laughter.) 0010 1 COMMISSIONER PIWOWAR: All right. Thank you, Steve. 2 Seriously, good morning, and welcome to members of the Committee 3 as well as those of you joining us for this event in the 4 audience and by webcast. As with prior meetings, the 5 Subcommittees are presenting recommendations that are the result 6 of tireless efforts. I hope that these will generate thoughtful 7 discussion that starts here and continues after we adjourn. 8 I would like to join Chair White in thanking Steve for his 9 great service to the Commission, and in turn, to the public that 10 we all serve. Steve's job has undoubtedly been a challenging, 11 and as Chair White note, a productive one. But for me, what I 12 think about is he's always paired his experience and insights 13 with a dose of good humor, which is something that I, and I'm 14 sure the Staff, have appreciated and enjoyed. 15 I want to wish Steve the best in whatever he decides to 16 do, but only after a well-deserved vacation. Thank you. 17 MR. LUPARELLO: Thank you. Let me take a moment to 18 introduce my colleagues in the Division of Trading and Markets. 19 To my immediate right is Gary Goldsholle, who is the deputy 20 director of the Division, and to his right is David Shillman, 21 the associate director in the Office of Market Supervision. 22 Also at the other end next to Commissioner Piwowar is Mark 23 Flannery, who's the Chief Economist and the director of the 24 Division of Economic and Risk Analysis. 25 Standard disclaimers apply to today's meetings. Any views 0011 1 expressed by the staff in this forum are ours alone and cannot 2 be attributed to the Commission or the Commissioners. And that 3 statement will be even more true for at least a couple of us in 4 the coming weeks. 5 So on to the Subcommittee recommendations, as you all 6 recall, at the last advisory Committee meeting in August focused 7 on the preliminary recommendations of the Market Quality and 8 Customer Issues Subcommittees. At the meeting, several expert 9 panelists represented a range of perspectives, discussed their 10 views on the issues, and participated in an open dialogue with 11 Committee members, the Chair, Commissioners, and Commission 12 Staff. 13 Since that meeting, both the Market Quality and Customer 14 Issues Subcommittees have held several meetings and proactively 15 solicited participation and consultation from various types of 16 market participants, including those not participating directly 17 in the advisory Committee. 18 In addition to views expressed by the expert panel at the 19 August meeting, the Commission has solicited public comment on 20 the recommendations, and has received several responses that 21 have been shared with the Subcommittee and posted to the comment 22 file on the Committee's website. 23 Today both the Market Quality and Customer Issues 24 Subcommittees will be presenting their revised recommendations 25 for full Committee consideration. And consistent with prior 0012 1 practice, these revised recommendations were posted to the 2 comment website and publicly available prior to today's meeting. 3 4 So with that, I think we'll start with the Market Quality 5 Subcommittee's recommendations, and I'll ask Eric Noll, as the 6 chair of that Subcommittee, to present the revised 7 recommendations. 8 MR. NOLL: Thank you, and good morning, everyone. Thank 9 you, Steve, and thank you for the pleasure of working with you 10 over the last couple of years in your current role. 11 We're going to present our recommendations primarily 12 around limit up market-wide circuit brokers and market opening 13 this morning. As Steve alluded to, this has been the topic of a 14 lot of meetings and a lot of discussion. And I will start out 15 with our recommendations, and then talk a little bit about what 16 we've heard from some other market participants and some of 17 their concerns about what we're proposing. 18 So when we looked at the limit up/limit down mechanism, 19 particularly around August 24th but more generally in its 20 regular operations, one of the things that we noted around that 21 was that the reopening auctions did not work effectively. So 22 while there was any number of large number of limit up/limit 23 down conditions, our believe was that the limit up/limit down 24 mechanism actually worked at least in one of its activities, 25 which was to prevent runaway stocks. 0013 1 So it actually stopped stocks from running away. But when 2 it reopened those securities, it was unable to re-aggregate 3 liquidity at an appropriate price to offer free trading again, 4 often triggering then a series of other limit up/limit down 5 conditions. 6 So acknowledging that the exchanges have done great work 7 at cleaning up the reference price for the limit up/limit down 8 mechanism and have really cut down on the number of conditions 9 and the number of limit up and limit down halts that have been 10 issued, we concentrated really on the re-opening process or the 11 re-aggregation of liquidity. 12 And based on the meetings that we had and the people that 13 we had come in and long at the data around this, it is our 14 belief that the reopening auctions simply do not work as 15 designed And it is further that our belief is that they are 16 unlikely to start to work. 17 So we recommend unanimously as a Committee that we 18 eliminate the halt and reopening auction process in its 19 entirety, and that we move to a mechanism where a limit price, 20 when it's hit, and it's stuck on that limit price for a period 21 of time -- we used four minutes; obviously, that time can be 22 adjusted based on data -- where it hit and it stuck on that 23 limit price for four minutes, that the bands readjust around 24 that limit price so that the bands slide as opposed to the stock 25 halting. 0014 1 Our concern around that really was driven by two things. 2 One is, we have a bias to having markets remaining open. And 3 that's not uniform, I know, in the industry, but our bias on the 4 Committee level was that markets should remain open. And by not 5 halting stock and reopening, there was a better chance of that. 6 Our other concern was that to re-aggregate liquidity at a 7 good reopening price, that it was better to have the operation 8 of the free market do that in a competitive environment in a new 9 limit up-limit down decision as opposed to a half and a 10 reopening. 11 And our concern for that reason was that participation in 12 the auctions is low, it continues to be low, and that the 13 behavior of market participants other than certain highly 14 sophisticated electronic market-making firms, but the bulk of 15 market participants do not have the capability, nor do they have 16 an incentive, really, to participate in those reopening 17 auctions. And so by trying to force them to do so by changing 18 the auction process in various ways, we felt very strongly that 19 that would continue not to work. 20 That being said, clearly the exchanges and the limit 21 up/limit down Committee and various other constituents have 22 continued to work on how can they improve the auction. And I 23 know the exchanges recently came forward with what they call 24 amendment 12 to the limit up/limit down plan, which does ask for 25 some revisions to the auction process in an attempt to cure some 0015 1 of these issues. 2 I want to be really clear because there was a lot of 3 concern over the last couple weeks that we were in opposition to 4 the exchanges' plan. And I think where we're coming down as a 5 Subcommittee is not so much oppositionally to that plan, but a 6 desire to work with the limit up/limit down Committee to find 7 the right ultimate solution. 8 I'll speak for myself here. I'm absolutely positive that 9 I don't have the ideal solution or this may not be the ideal 10 solution. We think it is the better solution than an auction 11 process, and there may be ways that the auction could in fact be 12 cured over time, that it would work very well. 13 But our belief is that that's unlikely. So what we would 14 like to do and what we'd like to suggest is that we work with 15 the limit up/limit down Committee, that we not stop amendment 12 16 and allow that to continue to go forward, but that the end game 17 here ought to really be going to this kind of non-halt system 18 for the limit up/limit down bands. 19 I would also say that some of the complaints were, well, 20 we were off at the limit up/limit down Committee doing these 21 things and the Subcommittee didn't work with us. We clearly 22 offered multiple times to have participants from all of the 23 educations join us for these discussions. 24 I will say that with the exception of BATS and CBOE, none 25 of the other exchanges chose to join those discussions. So we 0016 1 find it a little bit ironic that one of the complaints is, well, 2 you guys didn't coordinate with us to do this, when we made 3 every effort to do so. 4 That being said, though, we do not want to be in 5 opposition to them or the various constituencies who feel 6 strongly that they'd like to see a more coordinated effort and 7 not force us into an either/or choice. We stand ready to work 8 with that Committee and move this forward. But we still 9 continue to believe that, as we're proposing, that is the better 10 solution. 11 Other two variants around the limit up/limit down that we 12 think are important, one of which I think has already been 13 undertaken, is that the clearly erroneous rules need to be 14 consistent with the limit up/limit down bands, and so that there 15 is an overlap around those where there are edge cases that would 16 not apply. 17 We think that brings certainty to the market-maker 18 community and it brings certainty to other market participants 19 about which trades get broken and which ones do not get broken. 20 So we think that that's an important part. 21 The other part that we would recommend is that the limit 22 up/limit down bands start to incorporate a concept of mean 23 reversion into them because many of the triggers that occur 24 around the limit up/limit down bands are a stock that trades, 25 say, for example, at 100, trades down to 90, has a halt, 0017 1 reopens, and then immediately trades back to 100, triggering 2 another halt on the way back up, when in fact if there was a 3 concept of some sort of mean reversion into that, you would not 4 get that second limit up/limit down condition. So we'd like to 5 work on our -- suggest that the Commission work on incorporating 6 the concept of mean reversion. 7 The other two recommendations we had, the first one was on 8 market-wide circuit breakers. As we've said in previous 9 meetings, on the morning of August 24th, the market-wide circuit 10 broker, if all the stocks had been opened in a timely fashion on 11 that morning, we would have triggered or were likely to have 12 triggered a market-wide halt using the S&P 500. 13 And it was based on all of the conversations we had with 14 market participants. Generally, the view was that thank God we 15 did not have a halt. That would have been a disaster. It would 16 have been a terrible thing. And so while not rejecting the 17 notion the market-wide circuit brokers are a good market safety 18 device there, our believe is that they're probably too tight, 19 given current market conditions, and they should be widened out. 20 21 Now, we didn't talk about all of the steps. Our initial 22 suggestion was to move them to 10 percent, the initial one to 10 23 percent. Our assumption in doing that is that all of the other 24 stages to the market-wide circuit brokers would move by a 25 similar -- stretch out in a similar way around that. 0018 1 Our last recommendation was really about market openings. 2 Those, again, I think the exchanges have done great work at 3 moving those forward and helping to solve that problem. Our 4 belief and our firm recommendation is that every market that 5 opens stocks ought to be open at 9:30 as close as possible, and 6 that there should not be delays in that. 7 Anything I missed from other Committee members? 8 MR. NAZARALI: Sorry. Did you mention that the band would 9 be based on the futures? 10 MR. NOLL: We mentioned -- well, we had suggested, with 11 the market-wide circuit brokers, that the Commission consider 12 moving to looking at futures price as opposed to the underlying 13 cash price. That was not a unanimous suggestion in the 14 Subcommittee, but we do think it's worth exploring. 15 It's probably less relevant to use the futures if we feel 16 like we've got good opening, real prices for the cash index. 17 But absent that, there's a real benefit, I think, to using the 18 futures price as opposed to the cash price. 19 MR. LUPARELLO: Eric, thank you for those thoughtful 20 recommendations. And I'll open it up to questions and comments 21 from the rest of the Committee. Before I do that, I just want 22 to say, as the Staff, we appreciate the context, the work, and 23 the careful deliberation of the Subcommittee, and especially the 24 context of the enhancements that have been made since August 25 which, I think, as you point out, don't undercut at all the 0019 1 recommendations you make, but put them in the light of where we 2 are now as opposed to where we were 18 months ago. 3 And we'll start with Jamil. 4 MR. NAZARALI: So Joe Ratterman and I held a call with our 5 largest retail broker-dealer clients yesterday to review the 6 recommendations, and wanted to just put forward some of their 7 reactions. 8 So number one, they were very strongly supportive of the 9 recommendations and felt strongly that continuous markets, both 10 opening everything on 9:30, not halting, and widening the 11 market-wide circuit broker, are all good things because the 12 markets keep trading. Having said that, they felt that the 13 four-minute pause is a little bit long and would be much more 14 supportive of a shorter pause because of the discontinuity from 15 the four-minute pause. 16 And then the second reaction was that they're very 17 supportive of the mean reversion concept, but wanted to 18 incorporate it in a way that keeps it very simple. So, for 19 example, you could use the previous day's closing price. But 20 they just wanted to avoid a situation where it became difficult 21 to calculate -- either it's this or this. But if you used 22 something like the previous day's close, it could be an easy 23 calculation. But that was the reaction of the retail broker 24 dealer community. 25 MR. LUPARELLO: Joe Mecane? 0020 1 MR. MECANE: Sure. So I agree with the structure of the 2 recommendations. I think they make a lot of sense. I had one 3 comment and one question. 4 So I was going to echo the four-minute comment. And if I 5 understand it correctly, the way it would work is you would 6 start with your 10 percent limits. You would hit one of the 7 bands. It would wait four minutes; then it would adjust down 8 another 10 percent, and cascade from there. 9 And I think the rough math of that is that it would take 10 about a half an hour for a stock to drop 50 percent, which in a 11 situation where there's valid news or something happening in the 12 marketplace, struck me as a long period of time. So one thing I 13 would just suggest for consideration is whether the four minutes 14 should be brought in to reflect that. 15 MR. NOLL: I don't think the Committee was married to four 16 minutes. Let me explain, though, why we ended up around four 17 minutes. 18 There was a sense that there were market participants who 19 would, in fact, participate in the marketplace if they had 20 enough time to process the information, and so that there was 21 some talk about 10, 15 minutes. Generally, I think the 22 Subcommittee felt that that was way too long for other market 23 participants to come in. But there was also a sense that doing 24 it in seconds or less than a minute was too short. 25 So whether four is the right amount or not, I think, is 0021 1 open to debate, and probably some quantitative work can be done 2 around that to decide what the appropriate length of time around 3 that would be. 4 To your latter point about taking a long time to drop 50 5 percent, particularly if there's news in the marketplace. I 6 want to be clear that nothing that we're suggesting here would 7 apply to the normal stock halt rules for news pending or other 8 events that exchanges can call a regulatory halt to trading. 9 This would just be for the limit up/limit down mechanism. 10 And so, again, the idea being here is you stop runaway 11 stocks and you allow that stepped function to the market to 12 readjust over time. And again, whether the four minutes is too 13 long and whether it should be two or three I think is more of a 14 quantitative question. 15 MR. MECANE: That makes sense. I would just highlight 16 with the news situations where let's say news is out and there 17 isn't reason to call a halt for dissemination or something along 18 those lines, that I just think you want it to be able to react 19 more quickly. 20 And then my other question was around increasing the 21 market-wide levels from 7 percent to 10 percent, which I don't 22 have a problem with. The question I just wanted to ask is, as 23 you may remember, when the 7 percent was chosen, part of why it 24 was chosen was we were trying to counteract for a situation 25 where there might be a lot of individual halts triggered. And 0022 1 then the rest of the market is still trading, and trying to 2 avoid that confusion. 3 So the question I would just ask is when you talked about 4 increasing from 7 percent to 10 percent, do you think that we're 5 comfortable enough with the individual circuit breakers that 6 there's enough room to get to 10 percent on a market-wide basis? 7 8 MR. NOLL: And that sort of hit on the crux of the problem 9 between the futures and the cash values. So I think for those 10 of us on the Subcommittee who felt that the limit up/limit down 11 mechanism may actually impede the discovery of cash prices in 12 the index in some way, that using the futures price may be a 13 more effective way to get to that level. 14 That being said, we also believed, or other members of the 15 Subcommittee believed, that the limit up/limit down mechanism, 16 as it improves and as we've gotten better with reference prices 17 and as we have the -- and if these suggestions go forward, make 18 that process work better, you're going to have less of a 19 negative impact. 20 MR. RATTERMAN: Steve, this is Joe. I have a comment. 21 MR. LUPARELLO: Go ahead, Joe. 22 MR. RATTERMAN: Eric, I was wondering, did you talk 23 already about whether the reversion to the mean would be 24 symmetrical so that you'd revert down as well as back up with 25 that same kind of logic? 0023 1 MR. NOLL: Yes. I think our view was that there shouldn't 2 be a bias one way or another, but that the mean reversion 3 concept ought to be in place both upward and downward. 4 MR. RATTERMAN: Thank you. 5 MR. LUPARELLO: But the net result of that would be that 6 the band would be wider in one direction than the other. Right? 7 8 MR. NOLL: That's correct. There's a definitional 9 question about what "symmetrical" means. Right? So when we 10 talked about it, it was like, well, they're 10 percent bans. 11 They're symmetrical, except they're really not when you start to 12 think about the mean reversion concept. And people are talking 13 about that being symmetrical as opposed to the actual hard 14 percentage move. 15 MR. LUPARELLO: Reggie? 16 MR. BROWN: Thank you. From the ETF perspective, I think 17 a longer pause would bring more liquidity into the marketplace 18 and would allow for a strengthened investor experience from an 19 ETF perspective. So this is where ETFS and equities diverge, in 20 my opinion. 21 So from an ETF point of view, I think a longer pause 22 period will prevent some of the dislocations in price and would 23 strengthen investor experience in the ETF perspective. So that 24 view should be taken into consideration. 25 MR. LUPARELLO: Maureen and then Gary. 0024 1 MS. O'HARA: I was just going to echo some of the comments 2 that have been made with respect to what I see as one of the 3 roles of the limit up/limit down, which is to deal with 4 uncertainty. Right? When Joe talks about information, that's 5 not necessarily uncertainty. That's more risk. And the 6 challenge with uncertainty in very, very high-frequency markets 7 is that books can become empty and illiquidity emerges. 8 And that's one of the reasons for having mean reversion 9 because if the price is dropping simply because we have 10 temporary illiquidity, you really don't want to freeze the stock 11 in a place where it doesn't belong. And similarly, the question 12 of how long goes back to how long does it take to resolve the 13 uncertainty? Because I think that's what these are really 14 well-designed to handle, and maybe overall market halts are 15 designed to handle the problems induced by changes in 16 information that is change in the overall level. 17 So I lean towards a slightly longer pause, as Reggie 18 pointed out, because I think it's a complex situation as you 19 begin to look across the variety of securities that are now 20 trading. 21 MR. STONE: I have a general question. The first one is 22 that amendment 12 on BATS's website says it was submitted to the 23 Commission in September. It's not public, so I'm not sure what 24 the recommendations were from that group. So with that in mind, 25 this is what I'm coming from. 0025 1 This is an NMS plan. So when we look at the 2 recommendation, what are we actually asking the Commission to 3 do? To take this out of being a plan and making a rulemaking? 4 Or are we asking them to exert pressure from whatever was 5 written in amendment 12 to try and include these concepts in it 6 because they don't exist? 7 MR. NOLL: I think I'll defer to the Commission as to 8 publication and whether they feel it should be in the Reg NMS 9 plan or taken out and done as separate rulemaking. I would view 10 that as beyond our brief a little bit, to make that kind of 11 recommendation one way or another. 12 But I think our view around amendment 12 was, one, an 13 acknowledgment that the exchanges themselves have tried to 14 tackle this problem and take it on and solve it in a way. It 15 continues to be our believe that the reopening auction is not 16 the way to go here. 17 But that being said, I think our view is that the 18 exchanges continue to want to work on trying to improve this. 19 We did have a briefing call with BATS around this topic recently 20 as a Subcommittee. Their desire is to take on this 21 recommendation in part of the limit up/limit down Committee's 22 work and view it as the end state which to work to. 23 And so again, with a desire not to be oppositional to the 24 exchanges or the other market participants who continue to want 25 to work on this, our view is if that is how the Commission would 0026 1 like to move forward with this, is tossing this to the limit 2 up/limit down Committee to consider and to work on, that is 3 something that we would be agreeable to. 4 With that being said, we still think that the auction 5 doesn't work and that we'd like to see this as the end state. 6 But ultimately, I think this is up for the Commission to 7 consider how they'd like to deal with it. 8 MR. LUPARELLO: I would point out, in a coincidence of 9 timing, that amendment 12 was published yesterday, actually. 10 And I'd also remind -- in the context of the Commission's 11 authority over plans and plan participants, changes to plans 12 generally come from the plan participants, but the Commission 13 can, in the context of a plan, change the plan on its own 14 motion. 15 MR. STONE: Okay. So in terms of recommendation No. 1, 16 which is the auction, I agree with you that auctions don't work. 17 But the difference between what happens in futures and what 18 would happen in equities is that we're a fragmented market 19 structure. 20 And so my feeling is that a key component that's not in 21 this is the concept of how do you restart? In other words, a 22 stock has stopped. It's in its limit state. Now the band's 23 going to slide. How do you coordinate 13 different exchanges 24 and the dark pools? 25 MR. LUPARELLO: So that goes to the whole re-aggregation 0027 1 of liquidity argument, which is why I think some of the 2 exchanges and some other market participants have been 3 emphasizing the auction process as a way to re-aggregate 4 liquidity. 5 In our conversations around that, I think we conceded the 6 notion that if an auction process worked, and that it had ample 7 market participation in it, that an auction is a better way to 8 re-aggregate liquidity and reopen stocks than almost any other 9 market mechanism. 10 But it was just as firmly our belief that we didn't see or 11 hear or know of any current thinking around re-aggregation of 12 liquidity intra-day that would solve the auction problem. And 13 again, our belief is that the operation of the free market will 14 actually help determine where the real prices are as opposed to 15 having people exit the market, which is what they do today in a 16 halt. 17 So market participants step away and wait for stocks to 18 reopen on all exchanges before they come back into the 19 marketplace. And our belief is that they would not step away if 20 the market never halted, and that that active continued 21 participation in there would be a better way to re-aggregate 22 liquidity as opposed to a process that seems flawed in terms of 23 who's going to participate in the reopening process. 24 MR. STONE: So the only thing is, though, if you don't use 25 some sort of benchmark where everyone reopens, you still have 0028 1 the same adverse selection problem that people were trying to 2 get away from, and people will cancel their orders; whereas if 3 you -- and I don't know if this would work -- but if everyone 4 supposedly synchs in this right now and if you set it this time, 5 everyone's clock goes off, everyone can reopen, I don't know if 6 that is going to cause less of the adverse selection on 7 different exchanges at that price. 8 That's the problem that I see, is that you're going to get 9 bad prints from people, and nothing does -- we'll talk about 10 this later -- does worse for investor confidence than when 11 people think that they were disadvantaged in some way. 12 MR. NAZARALI: Gary, I don't think it's actually that 13 difficult. I mean, everyone's clocks are synchronized now for 14 the open and close. All you say is, after this time period, no 15 trades can go off outside of this band, right, until this time 16 period. And so all of the exchanges simply freeze their trading 17 unless there is a trade that will go off within the specified 18 price. 19 And just to expound on a point that Eric made, we talked 20 to a lot of firms, market makers, institutional traders, et 21 cetera, about the auction process intra-day. And in theory, as 22 Eric said, it's a great way to aggregate liquidity. 23 In practice, the opposite happens. When you halt the 24 stock, whether you've got an institutional algo working an 25 order, whether you're a liquidity provider or market maker, 0029 1 you're going to cancel all your open orders. Right? And so 2 rather than bring liquidity into the market, what it does is it 3 takes liquidity out of the market. 4 In addition to that, unless you've sent your order into 5 the primary market, your liquidity is not there. And so what it 6 ends up doing is it actually causes liquidity to dissipate, 7 where if you just not halt it but prevent trades from going off 8 at prices outside of the band, what it's going to do is it's 9 going to keep that liquidity in the market, and it's going to 10 allow for much easier reentry into that market. Right? Because 11 the liquidity's already there. Firms can put it on any venue. 12 They don't have to send it in to the primary market. 13 MR. STONE: So, Jamil, I agree with you the auctions 14 aren't worked and the halt concept, the liquidity aggregation, 15 isn't working, either. My question is that the same issue that 16 I had with the market-wide circuit breakers, where I'm actually 17 on the opposite side -- I don't think -- I grew up in the 18 futures market and we halt all the time, with price limits, and 19 it doesn't -- people don't freak out about it. It just happens, 20 and then you restart. 21 But I think the problem with the market-wide circuit 22 breakers is more of our fear that we don't know how to reopen. 23 And I see the same problem with this, that we don't know how to 24 reopen yet. It's the same problem. And unless we talk about 25 how we reopen somebody when these bands are hit and actually 0030 1 nail that down, the market-wide circuit breaker fear and this 2 not working are still going to be problems. 3 MR. NAZARALI: But I don't understand why it's hard to 4 just reopen after that period of time. After -- call it four 5 minutes, two minutes, one minute, the stock will -- well, it 6 never closed. Right? But you allow trades to go off at a price 7 that is within the new band. That's all you do. 8 So say it's halted at 10:32. Say it's for one minute. At 9 10:33 -- well, actually, during that period of time, any trades 10 can go off within the band. 11 MR. STONE: Right. 12 MR. NAZARALI: Right, up to the limit price. At 10:33, 13 there's a new limit price. All the educations know that new 14 limit price. All the exchanges know it's 10:33. And any trade 15 which is within that band can go off. It doesn't seem that 16 complex. 17 MR. STONE: Okay. But the thing is, though, what you just 18 said is not what was actually in the recommendation. So now I'm 19 agreeing with you. So remember, I'm working off of what was 20 submitted in terms of that, in the time sequence of saying -- 21 when the slide was going to happen and when it was going to 22 reopen isn't in the recommendations. I'm fine with it now. 23 MR. NAZARALI: Okay. Great. We'll add that clarity. 24 MR. STONE: But I still have an issue with the fact that I 25 don't understand what we're recommending. Are we recommending 0031 1 that this is something that the Commission actually puts on? 2 Because I haven't read amendment 12, so therefore I'm uncertain 3 as to what our recommendation for the Commission to act is. 4 MR. NOLL: Again, I think where we are a Subcommittee are 5 recommending, that this is the end state that the Commission 6 gets to. But again, with a desire to work with the other market 7 participants here, I don't think we're trying to -- we're trying 8 not to be oppositional to what anyone else is doing in the 9 marketplace here. I think everyone's working in good faith to 10 try to find good solutions to this problem. 11 What we're saying is we believe that this is the best end 12 state we can get to. It's not ideal by any means, but the best 13 end state we can get to. And really, we're asking the 14 Commission to decide what's the best way they want to move 15 forward with this, whether they want the limit up/limit down 16 Committee of the exchanges and other market participants to work 17 on it, and work on this as a potential end state, or whether the 18 Commission wants on its own motion to look at this. And they of 19 course are free to make other choices as well. 20 MR. LUPARELLO: Eric, not to -- or maybe to try to pin you 21 down a little bit from the Subcommittee's standpoint, is the 22 Subcommittee agnostic as to the path to the end state? Or does 23 the Subcommittee have a preference for having these 24 recommendations work through the NMS Committee first, and 25 failing that, have the Commission step in? 0032 1 MR. NOLL: Yes. I think the latter suggestion, I think, 2 is where we're ending up because again, I think there was some 3 -- certainly in the last couple of weeks, a lot of concern for 4 various market constituents. I know the ETF community had some 5 concerns and the exchanges had some concerns that this was going 6 to end up in a fight and nothing was going to get done because 7 it was going to be our recommendation versus the NMS plan 8 recommendation, and there was just going to be a free-for-all. 9 And I think our view was, look, we'd like to see progress 10 toward this. And so there's no, "This has got to be this way, 11 not that way." But I think our view was, this is the path we'd 12 like to see it take. And if the Reg NMS Committee wants to take 13 this on and try to make that happen this way, we fully endorse 14 that. If, on the other hand, we don't end up here, our 15 recommendation remains the same, that we move to this kind of 16 model. 17 MR. LUPARELLO: And I think it could certainly be seen 18 that this is steps in an evolution that you could get to the end 19 state or you could get to the approval of the changes in 20 amendment 12 and see this as further development after that. 21 Rick? 22 MR. KETCHUM: Completely agreeing with what Eric said the 23 last time and not repeating any of that, just two small points. 24 I'd like to agree with Reggie and Maureen that I think while Joe 25 makes some important points vis-a-vis some of the dysfunctions 0033 1 that had come with respect to significant delays, up to four 2 minutes, I think the risks of a variety of trading environments 3 which can create cascading waterfalls to me are worth taking 4 those risks, and I would keep it at four minutes, at least as a 5 first step, watching the process continue to improve from there. 6 7 Certainly, if it was done for the shorter time, I would 8 make it four minutes for the second limit, even if it wasn't 9 four minutes for the first limit, because I think there still is 10 risk of cascading waterfalls that I wouldn't want to see open up 11 very, very quickly. 12 The second thing is, on the -- this is really sort of 13 dicta -- but on the thought of using the futures price with 14 respect to circuit breakers, I agree it's much cleaner and 15 simpler and straightforward and more accurate. On the other 16 hand, I would not want it to be 10 percent if it was futures 17 price. 18 I think the concern about triggering 7 percent off of 19 stock price movements is exactly there with regard to 10 percent 20 off of futures in situations where it really doesn't -- again, 21 I'd return to what -- having been there at the creation, what 22 was the initial purposes of system-wide circuit breakers, which 23 was to only intervene when there were serious concerns of credit 24 risk and a clear indication that the markets were not only 25 momentarily dysfunctional but fundamentally dysfunctional, and 0034 1 requiring something that, even with the risks of restarting the 2 market, were worth it. 3 So I would if anything urge you to go beyond 10 percent. 4 Certainly if futures prices were ever used, I would urge you to 5 go beyond 10 percent. 6 MR. LUPARELLO: Maureen? 7 MS. O'HARA: Rick, going back to your point about multiple 8 movements of the limit up/limit down, we as a Committee did talk 9 about having the first limit up/limit down period be shorter and 10 then the next one -- move it longer and longer still, and in 11 part to capture the point you raised, which is you really don't 12 want to have a situation, which at times you have now, where you 13 open and then you immediately go into another one. 14 But I think there were very good arguments raised about 15 part of the challenge of complexity. Where in the world are you 16 in these multiple things, and how long as it is, and which one 17 is this. And so to also balance some of the issues that Joe 18 raises, that these things impede the market in ways that you may 19 not like, its simplicity went out. 20 MR. KETCHUM: And I'm good with simplicity at four 21 minutes. 22 MR. LUPARELLO: And I would also point out on the 23 market-wide circuit breakers, again, comparing most recent 24 experiences to August of 2015, you do see certain changes the 25 markets were much more effective at getting a greater number of 0035 1 stocks open closer to 9:30. 2 You also have S&P changing the way it calculates the index 3 from the opening of the primary to the first print in the market 4 more broadly. So not to say that that's necessarily a solution 5 to every one of the issues that has been articulated, but you do 6 have less opportunity, I think, for a real deviation from the 7 cash price point of a futures price point. 8 Any other comments or questions before we go to a vote of 9 the Committee? I guess one question I would have, Eric, for 10 you, is there are three different recommendations here. Is it 11 the desire of the Subcommittee to present them all as a single 12 recommendation, or would you prefer that we go item by item? 13 MR. NOLL: I think our view is that they're item by item. 14 They don't seem to be tied to one another. 15 MR. LUPARELLO: That's helpful. So I'll assume a second 16 for each of these. If I can have a global second for the three 17 recommendations? 18 MR. NAZARALI: Second. 19 MR. LUPARELLO: Thank you, Jamil. 20 So the first one is on limit up/limit down, which I think 21 we've hit on, which is there's three components to it, 22 basically. It's the no halt but the limit state and then the 23 adjudicated bands, the alignment with clearly erroneous, and the 24 idea of mean reversion. 25 So how does the Committee vote on the recommendations of 0036 1 the Subcommittee on limit up/limit down? All in favor? 2 (A chorus of ayes.) 3 MR. LUPARELLO: Any opposed? 4 MR. RATTERMAN: Aye. 5 MR. STONE: No. 6 MR. LUPARELLO: Joe Ratterman, that was a vote in support? 7 8 MR. RATTERMAN: Affirmative. 9 MR. LUPARELLO: And Gary Stone, that's in opposition. 10 That's a majority, so the Committee has accepted the 11 Subcommittee's recommendations. 12 The second is on market-wide circuit breakers which, Eric, 13 is it fair to say is somewhat of a more general recommendation, 14 that the Commission and its staff study the issue of wider 15 circuit breakers and alignment with the futures? 16 MR. NOLL: Well, I think, if I could recharacterize it in 17 this way, which is we recommend wider circuit breakers. I think 18 the open issue for the Commission is whether you should use away 19 from the cash price and use the futures price. 20 MR. LUPARELLO: All in favor? 21 (A chorus of ayes.) 22 MR. LUPARELLO: Any opposed? 23 (No response.) 24 MR. LUPARELLO: That one is unanimous. 25 And then the last is, again, do you want to put a fine 0037 1 point on the market opening recommendation? 2 MR. NOLL: Yes. And again, this is not commenting on 3 anyone's business model or opening process. But I think our 4 desire was to see, in order again, for market quality, 5 particularly around issues around market-wide circuit breakers 6 and limit up/limit down, that all stocks at every exchange be 7 open as close to 9:30 as possible. 8 MR. LUPARELLO: All in favor? 9 (A chorus of ayes.) 10 MR. LUPARELLO: Any opposed? 11 (No response.) 12 MR. LUPARELLO: Great. All three recommendations of the 13 Subcommittee are accepted by the full Committee and will be 14 presented to the Staff. Eric, thank you and your Committee very 15 much for its work. 16 Before we move to the next Subcommittee's recommendations 17 to the Committee, I'll invite Commissioner Stein, who has joined 18 us, to make some opening remarks. 19 COMMISSIONER STEIN: I'm not going to really give opening 20 remarks. I just want to welcome everyone today, and thank you 21 again for taking time out of very busy schedules. The brain 22 power in the room is powerful, and we truly appreciate you 23 giving us your best thoughts about some of these issues that the 24 Commission will be continuing to look at for quite some period 25 of time. So thank you very much to everyone, and I look forward 0038 1 to the next Subcommittee's recommendations. 2 MR. LUPARELLO: Thank you, Commissioner Stein. 3 And I'll ask Manisha Kimmel, as the chair of the Customer 4 Issues Subcommittee, to present the Subcommittee's revised 5 recommendations. Manisha? 6 MS. KIMMEL: Thank you. So we have two recommendations 7 and they're similar to what we presented in August, so I'll 8 spend most of my time on what's different from our August 9 recommendations. 10 Recommendation 1 is, understand and monitor investor 11 confidence and trust in the U.S. equity market structure. This 12 is again a recommendation that the Office of the Investor 13 Advocate move forward with getting a better understanding of 14 investor perception and behavior as it relates to market 15 structure. 16 Some of the issues that we discussed in August was the 17 difficulty of separating investor sentiment from investor 18 fairness, and the need to be very clear on what research 19 questions that we're trying to answer. 20 In response to this, we did meet with the Office of 21 Investor Advocate and talked both about different research 22 methodologies as well as framing of research questions. And we 23 believe that they're in a position to move this recommendation 24 forward, keeping in mind the goals of the recommendation; but 25 the details of implementation, really leaving it to their 0039 1 expertise. 2 That's really the focus of recommendation 1. 3 MR. LUPARELLO: Manisha, maybe I'll call an audible there. 4 Given that the two recommendations are fairly substantively 5 different -- 6 MS. KIMMEL: Sure. 7 MR. LUPARELLO: -- in order to give them both, I think, 8 fair discussion, maybe we'll break at this point and ask for 9 comments or questions on that, and then go to recommendation 2 10 after that, if that's okay with you. 11 MS. KIMMEL: That's great. 12 MR. LUPARELLO: So with that, any comments or questions on 13 recommendation No. 1? Gary? 14 MR. STONE: I wasn't in favor of this the first time it 15 was proposed, and I still have major issues that this is outside 16 the mandate of the SEC, that investor confidence is not -- as 17 Chair White noted in the beginning, the Commission should be 18 focused on transparency and disclosure so that people have 19 adequate information in order to be able to -- in order for the 20 SEC'S mission of investor protection, maintaining fair and 21 ordinarily and efficiency markets, and the facilitation of 22 capital. 23 When I look at what the SEC'S budget can be spent on, I 24 think there are other places it can be spent on rather than this 25 that would be more effective for their mission and their goals. 0040 1 And the only other thing I would say is that I think that 2 if this is indeed something which is important, there are many 3 other private pathways that this could be done. People do polls 4 all the time. Of course, recently they haven't exactly been 5 accurate, but nevertheless, if the market wants it, they should 6 be able to create it. 7 The news reporter that we had last time from Barron's, he 8 said this might be something that Barron's would do or create. 9 I look at ETF issuers. It's something aligned to what they 10 would look at in terms of how their business is doing. And when 11 I look at equity analysts understanding some of these investor 12 confidence type measures, it would be how you would actually 13 forecast out how a retail broker in their actual business is. 14 So I don't support this one for those reasons. 15 MS. KIMMEL: Yes. And I think the issue about resource 16 constraints and where the focus should be was one of the things 17 we did discuss. And we believe that, to your point, academia, 18 industry, and other venues are good partnerships. So not 19 necessarily consuming a ton of resources, but ensuring that 20 there's benefit from learning about investor confidence, that's 21 really where this comes from. 22 MR. LUPARELLO: Maureen? 23 MS. O'HARA: Manisha, can I ask you a question about -- 24 it's always one of those things that people love the market when 25 it goes up and not so much when it goes down. And particularly 0041 1 when we're thinking about investors who may have relatively low 2 levels of understanding of market structure, I worry a bit about 3 what exactly are you getting when you begin to survey about the 4 market. 5 I'm also worried about in some sense, if I read the goals, 6 then the survey should be not just of people who participate, 7 but people who don't. And there's a lot of people who don't. 8 And I'm just concerned about exactly what is it that you'll pull 9 out and what do you do with it when you get there? If you have 10 a metric, if the confidence is 43 and it used to be 46, what do 11 we do about that? Did you discuss what one does with this and 12 how one designs it? 13 MS. KIMMEL: We did. And I don't know, Nancy, if you want 14 to comment more specifically on that. 15 MS. SMITH: Yes. We did discuss how this could become 16 actionable, and spent some time with the Office of the Investor 17 Advocate to look at that. And that's one reason why it's not 18 just focused on investor perception. That's an important 19 component. But it's also looking at the data we have and the 20 data assets to ascertain what is the actual behavior. 21 And I think, Maureen, to your point exactly, we did talk 22 about the fact that stock participation is down and people don't 23 know why. Why are people, the percentage of people, investing 24 in the markets actually going down, the stock market? And you 25 have the issues of sentiment -- do I think the market's going up 0042 1 or down? 2 But that's not really what we were focused on. We were 3 focused on these issues of, is there a connection between -- how 4 do you look at the connection between market structure, let's 5 say, if there's a connection to volatility, investor perception, 6 then stock market participation? And then people not feeling 7 that the market is maybe riskier than it really is in terms of 8 an investment vehicle. 9 So I think your point is well taken, that you really need 10 to look at why are people deciding not to participate? And 11 there was a recent poll -- and I agree with Gary that some of 12 these polls, they have those error rates for a reason -- but one 13 of the findings was that for millennials, a good chunk of them 14 believe that it's too risky to invest. 15 So these are important issues for capital formation, and 16 it's really looking at the issues that we're concerned about at 17 maybe the 30,000-foot level versus some of the more what I would 18 call what we just did in the last session in terms of how the 19 market actually operates on a more granular level. So this is 20 taking that up a notch and saying what's actually happening with 21 individual investors. 22 Did anybody else on the Committee want to make a comment? 23 MR. LUPARELLO: I think Ted and then Joe. 24 MR. KAUFMAN: Yes. I think the thought here is the 25 mission of the SEC, and its mission statement says it's to 0043 1 protect investors. And we have a lot of people tell us what 2 investors think and how we're protecting investors. But I think 3 the idea of actually asking the investors themselves, it's going 4 to be very difficult. But most of the things I've seen in this 5 meeting are incredibly difficult and complex to do. 6 In terms of using other polls, I think that to many, many 7 polls out there that are designed to reach a certain objective, 8 not that they're not true, but in terms of investors, I read 9 many, many times about how happy investors are, how wonderful 10 investors are, how our markets couldn't be freer or fairer. And 11 they come from someone who basically wants to sell the idea that 12 the markets are freer or fairer. 13 So I think an important part of this is that there be an 14 independent entity, which is the SEC, which is what I think 15 their basic mission statement says they should do, and what they 16 should do that I think is one of the more important things they 17 could do is make sure that investors are being protected. I 18 think this is a good first start. It's just a first start. 19 The other point I want to make is that we're going to be 20 monitoring this. This is not like you take a snapshot. This is 21 a motion picture. So by checking how investors go in good 22 markets, in bad markets, we'll get a much better idea. It's the 23 only way you can do it to actually see what is going on. But 24 it's going to be easy or it's not going to be easy, but I think 25 it's very, very important, and I think it deserves a major 0044 1 portion of the resources that are required to make it happen so 2 that we can protect investors and live up to the SEC mission. 3 MR. LUPARELLO: Joe and then Gary. 4 MR. MECANE: Just a question. When you were going out and 5 speaking to industry participants about this idea, especially 6 for, let's say, the retail firms who deal with individual 7 investors regularly, did they have any feedback in terms of what 8 ways to potentially construct this to make it meaningful, or 9 what type of feedback you thought you'd get from this type of 10 survey? 11 MS. KIMMEL: Yes. I think there were two pieces of 12 feedback -- and Jamil, you can add to this -- but we heard that 13 what investors say and what they do is different, and that you 14 need to understand both. Some of the retail broker-dealers do 15 measure. They have indexes measuring those types of 16 participation, and I think that's valid. 17 So that was one of the things we did to change the 18 recommendation, specifically that we're not saying that 19 secondary research and understanding investor participation is 20 outside the scope here, that you have to look at both. 21 MR. NAZARALI: And if I can just add to what Manisha said, 22 I think some of this really strong feedback we got from our 23 retail broker-dealer clients echoed some of the concerns that 24 Gary and Maureen raised. One is that market structure is 25 incredibly complex, and individual retail investors don't really 0045 1 understand it well enough to be able to meaningfully give their 2 viewpoints on what might be better or not. Even within this 3 Committee we grapple with very complex issues, and there's not 4 consensus on one thing versus another. 5 And so that was one thing. And then the second thing is, 6 it's really important that the survey be constructed and 7 administered in a way such that the vast majority of investors 8 who may be very happy with the state of the markets but may not 9 response to the survey, versus a small group of dissatisfied 10 investors who are dissatisfied enough to respond -- if the 11 survey is not administered correctly, the feedback will be based 12 on the responders, which those that -- as we find from online 13 ratings, they have a higher propensity to respond. 14 So incorporating those two comments, not asking the 15 individual retail investors to talk about complex market 16 structure issues -- you don't want to ask them about maker-taker 17 or anything like that -- and also making sure it's really 18 administered in a way that doesn't create this perception -- or 19 base the results on a small minority, I think, would be very 20 helpful. 21 MR. LUPARELLO: Gary and then Mark. 22 MR. STONE: Just a question. Is this going to be publicly 23 released, or is it something that the SEC uses internally? 24 MS. KIMMEL: I think the thinking was it would be publicly 25 released. And I think, too, another point raised about how this 0046 1 would be actionable -- one of the other things we did talk about 2 was usability of disclosures. And I know in a recent release of 3 confirm market disclosures, the regulators have used focused 4 groups, used that to understand how retail investors -- to 5 Jamil's point, these are very complicated things. You use a 6 term like markdown, people think they're getting a deal. 7 So I think that type of analysis as well is meant to be 8 actionable. 9 MR. STONE: And just one other thing, just along those 10 lines. I think people can be incredibly unhappy but still be 11 very protected by their regulator. 12 MR. LUPARELLO: So clockwise, we'll go Mark and then Brad 13 and then Rick. 14 MR. FLANNERY: Okay. Thank you. To follow up on 15 Manisha's last point, I find it very hard to figure out what to 16 do with an overall opinion poll about the market. But I find it 17 much easier to think about what to do about disclosures and 18 trying to investigate whether disclosures are in fact 19 disclosing. It seems to me that there are some disclosures that 20 are meant deliberately not to disclose, and there I think we can 21 do some really good research. 22 I'm much less -- maybe I'm just -- I'm not imaginative 23 enough. But I'm much less clear on what we would do that's 24 actionable based on the notion that the people who aren't in the 25 market think it's too risky or the people who aren't in the 0047 1 market aren't sure that they trust it. 2 But the disclosure stuff, I think, is extremely important, 3 and we've been trying to do more of that inside of DERA. And 4 I'd like to do more of it elsewhere in the whole Commission. 5 MR. LUPARELLO: Brad? 6 MR. KATSUYAMA: Sure. So a couple thoughts. We talked a 7 lot about the difficulty of the survey. I think talking to the 8 Office of the Investor Advocate, I think, gave us a good deal of 9 confidence that that's an established organization. It has a 10 new mandate. 11 So from a resource perspective, Gary brings up an 12 interesting point. Where is the time and money better spent? 13 Given the formation of that organization, we thought that this 14 actually could be part of that mandate. They have some history 15 in terms of being able to -- or people on the team that 16 understand how to conduct these types of surveys, and really 17 just wanting to lend our expertise and say, if you are going to 18 do one, how can we help shape these questions? 19 I think neutrality is the most important aspect of this. 20 Ted brought it up, and ironically, Jamil was -- the bias is 21 bias. People can create whatever survey to get whatever they 22 want, and we think that having this happen under the SEC 23 umbrella gives everyone the comfort of that neutrality. 24 So even, too, from my seat, I look at investors and I 25 think also, surveys of institutional investors, you see certain 0048 1 things like Greenwich and other reports. But you have a smaller 2 subsection of sophisticated, educated investors representing 3 tens of millions of individual investors. What do they think? 4 And I think we haven't been able to point to a particular 5 survey or sentiment survey to say we hear from Kevin or we hear 6 from Met on panels like this. You go to industry conferences 7 and you hear those things. But can we really point a finger and 8 say, here's what the institutional investment community thinks 9 on behalf of tens of millions of individual investors? And 10 yeah, they are sophisticated enough to have an opinion on things 11 like maker-taker, et cetera. 12 So I do think that we have to, in a way, try to create a 13 baseline of sentiment. So even if we're worried about 14 sophistication of the individual retail, then let's focus, 15 maybe, on the institutional investors who are far more 16 sophisticated as -- they're a much better proxy, I think, of 17 retail sentiment than some of the people that purport to be 18 proxies for retail sentiment. 19 MR. LUPARELLO: Rick. And I would point out -- Manisha, 20 correct me if I'm wrong -- but the recommendation is 21 specifically surveys of individual investors, understanding that 22 Brad was making a separate -- 23 MR. KATSUYAMA: True. But it's an easy pivot to get to a 24 -- 25 MR. LUPARELLO: Not at all questioning -- not at all 0049 1 questioning your point. Just refreshing the recollection of the 2 Committee as to the Subcommittee's recommendation, or correct me 3 if I'm wrong. 4 MS. KIMMEL: Yes. I think the issue is individual 5 investor perceptions. But we didn't say you couldn't get 6 individual investor perceptions by talking to institutionals. 7 MR. LUPARELLO: Very good. Thank you. Rick? 8 MR. KETCHUM: As a Subcommittee member, I started as a 9 skeptic here, and I do agree that questions as to whether the 10 market sucks probably are not uniquely valuable. But I do think 11 it's -- a couple points. 12 One, I think it's important, as the point was made before, 13 to recognize in a variety of ways we do try to disclose 14 information to retail investors about best execution, about 15 payment for order flow, about a variety of other things. And 16 targeted surveys that would be helpful for the Commission to 17 understand how different sets of investors process information 18 and think about things or understand them, though certainly not 19 a replacement for focus groups, seems to me to provide some 20 value from a market structure standpoint. 21 The second thing that made me more of a convert just was 22 publicly released from the standpoint of an organization I used 23 to have a relationship with, FINRA, with respect to its 24 financial capabilities survey, which in the last version 25 expanded to a range of questions looking and slotting across 0050 1 different both income levels, size of portfolios, and 2 millennials versus baby boomers, et cetera. 3 And while it was not per se a market structures survey, it 4 did look at issues, to Nancy's point, with respect to the manner 5 in which they processed and thought about risk and a royalty of 6 other things. And I thought actually the survey results were 7 remarkably interesting, from the standpoint of the different way 8 that millennials processed and thought about risk versus persons 9 that would be in my generation. 10 And the last piece that I thought was interesting out of 11 this study, to get to Jamil's concern, was that I was surprised 12 by the number of persons that candidly indicated that they 13 didn't have sufficient information to have a view, which allows 14 you to evaluate the survey results for some context because 15 people weren't just winging it; 40, 50 percent of people 16 honestly said, "I don't have enough information to have views on 17 a variety of these questions." 18 So you had a little bit of ability to understand where 19 their reactions were coming from, et cetera. And those 20 reactions varied, depending on the size of their investable 21 assets and a variety of other things. 22 So I guess on the other side of seeing what came out of 23 the FINRA survey and the changes that were made with the help of 24 the Investor Advocate, I would strongly recommend that in the 25 end, even if the Commission's certainly sophisticated and mature 0051 1 enough to ignore things that aren't terribly helpful -- and I do 2 think there's something to be said, to Senator Kaufman's point, 3 that it's better to ask individual investors than not ask them 4 at all. 5 MR. LUPARELLO: Any other questions or comments? 6 MR. RATTERMAN: Hey, Steve, this is Joe. 7 MR. LUPARELLO: Go ahead, Joe. 8 MR. RATTERMAN: I have some similar concerns to Gary and 9 Maureen and Jamil, and also emphasized from our meeting 10 yesterday with the retail brokerage community, that there are 11 some concerns about how a survey could be conducted. 12 On an extreme example or visual, I would be very concerned 13 if we ended up in a situation similar to what just happened in 14 Great Britain recently, where a referendum was put out for 15 Brexit. In my mind, you could get dangerously close to 16 something like that, where you're asking lay people to opine on 17 complex subjects that they really have no background in, and 18 then your action at the end of that is based off of uninformed 19 input. 20 So it would have to be very carefully constructed for two 21 things -- to ask individuals questions about things that they 22 know and should be expected to know well, and secondly, about 23 things that, once you get a response, you would be willing to 24 take action on. 25 And I just see that as a very challenging endeavor. But 0052 1 if it's constructed correctly and there's momentum to do it, 2 just caution around trying ask the right kind of questions that 3 you would get good answers on and that you might actually take 4 action on and not getting too broad and being something like 5 what happened in England. 6 MR. LUPARELLO: Thank you, Joe. 7 Chester? 8 MR. SPATT: So I was critical of this proposal when we 9 discussed it previously. And I'm still of very similar sorts of 10 views and agree with many of the more critical comments in the 11 discussion. 12 I'd raise also one additional point. I think that a 13 central part of the SEC'S mission is what I think of as a 14 fairness regulator, to focus on the fairness of the markets. 15 And I thought that role was -- it sometimes got trampled on. 16 But I thought that role was, for example, very important 17 in the financial crisis and I thought overlooked by some of the 18 other federal regulators, who to some degree viewed their role 19 as trying to prop up the markets now, sometimes by taking policy 20 measures that were good for society, and I think that's all 21 fine, but I think sometimes also by trying to leave investors 22 holding the bag in some instances and undercutting investor 23 protection in some specific instances. 24 So as I reflect upon this type of recommendation and the 25 issue of confidence and what it would mean when we survey 0053 1 individuals, suppose the Commission was doing surveys in 2008, 2 an environment where clearly there wasn't so much confidence by 3 either the retail public or the institutional side. Would that 4 have been beneficial to the markets and the society? Not at all 5 obvious to me. 6 And I worry a lot that even though the questions would be 7 perhaps focused in particularly kinds of ways, that people would 8 either be reacting with respect to their broad views about 9 markets -- well, I think that's what anybody -- they're 10 expressing in prices -- and they would be reacting, perhaps, 11 about the complexity of the markets and the things they didn't 12 understand. 13 But I think that's sort of separate from the issue of 14 trying to provide investors good protection. So I think while 15 the proposal is sort of well motivated, my inclusion is it's 16 sort of a distraction from what should be the primary activities 17 of the Commission. 18 MR. LUPARELLO: Any other comments or questions? 19 MS. KIMMEL: Maybe just one with respect to the issues of 20 fairness. I think that's what really prompted this 21 recommendation. And I think what we found in our discussions 22 with the Office of Investor Advocate is there's a science to 23 research design and research questions, and it's an established 24 science, and it's something that we could tap into. So I think 25 the concerns, while valid, are addressable. 0054 1 MR. LUPARELLO: And before I call the question for a vote, 2 and not to attempt to influence one way or another, I think what 3 the Staff hears from this conversation is to have an 4 appreciation that this is an input, potentially a valuable 5 input, but one of just a number of inputs in terms of how it 6 determines its agenda and how it sets its policy. 7 So with that, can I have a motion? 8 MR. NOLL: So moved. 9 MR. LUPARELLO: Eric with the motion. And a second? 10 MR. KETCHUM: Second. 11 MR. LUPARELLO: Rick on the second. All in favor? 12 (A chorus of ayes.) 13 MR. LUPARELLO: I may have to count noses here. All 14 opposed? 15 (Show of hands.) 16 MR. LUPARELLO: I have -- Joe, are you -- Joe, are you a 17 yea or a nay, Joe Ratterman? 18 MR. RATTERMAN: I'm a nay. 19 MR. LUPARELLO: Can I see the nay hands again? I have 20 one, two, three, four, five, six, seven, eight. 21 It is -- did I get that right? Nine noes and seven -- I'm 22 counting nine noes and seven -- 23 Committee MEMBER: You may want to count the yeses, too. 24 MR. LUPARELLO: I will do that again. Give me the yeses, 25 hands held high, please. I'm predicting that number's going to 0055 1 be seven, but -- and I think my guess turns out to be correct. 2 The noes, I believe I counted eight noes and one no on the 3 phone. Professor Lo is not here. So I think that Subcommittee 4 recommendation does not pass. So thank you very much. 5 So my comments about how the Staff will receive that are 6 now moot, and Manisha, I will ask you to make the second 7 recommendation. 8 MS. KIMMEL: Let's keep going. Recommendation 2: So this 9 recommendation is around order handling disclosures and 10 modification of Rules 605 and 606 to provide meaningful 11 execution quality in order handling disclosures. 12 Since our August preliminary recommendation, we have had a 13 chance to analyze and review not only the SEC'S order handling 14 disclosure proposal, but also comment letters to that proposal. 15 So this recommendation now incorporates not only our thoughts on 16 our retail perspective for Rules 605 and 606, but also an 17 institutional perspective on 605/606, as well as our thoughts on 18 the difference between the two. 19 So to begin, first off, distinguishing between retail and 20 institutional orders, we believe, should be based on whether or 21 not the orders are held or not held. This was a fairly 22 consistent feedback from comment letters, and our group agreed 23 that when you think about the characteristics of retail and 24 institutional order flow, that this was an appropriate attribute 25 to use. From an implementation perspective, held and not held 0056 1 are already on the order tickets, so there's no implementation 2 effort associated with making this recommendation. 3 Next, and this is similar to our preliminary 4 recommendation, is to expand the scope of rule 606 reporters to 5 include exchanges and ATSs that route orders. 6 The next recommendation was regarding engaging the 7 Division of Economic Research and Analysis to determine the role 8 of SIP and proprietary feeds and Rule 605/606. And so this is a 9 change from our preliminary recommendation, where we recommended 10 that proprietary feeds should be used if you use prop feeds for 11 routing and execution, and SIP should be used, if that's what 12 you're using. 13 One of the panelists at our August meeting raised the 14 issue that this could be an expensive implementation that might 15 not really -- the value or the precision may not warrant the 16 expense. 17 So we're aware that this has been an issue, or issue of 18 concern, of whether or not there is some sort of differences, 19 whether or not you use SIP or proprietary feeds. So we think an 20 analysis should be done with respect to the use of prop feeds 21 and SIP feeds to make a determination of if they have a role in 22 Rule 605 and 606 reporting, if there should be a change, 23 essentially, from the SIP, which is what's used today. 24 In addition, another change from our August report was our 25 further discussions on payment for order flow. At this point we 0057 1 believe that the SEC should conduct further analysis on the 2 impacts of payment for order flow on markets, including the 3 potential for conflicts between broker-dealers and investors. 4 And as part of that discussion, we talked about other 5 inducements that should also be evaluated. Those include soft 6 dollars and access fees, and so we believe that this analysis 7 should include looking at the data coming out of the access fee 8 pilot. 9 Our recommendation is actually divided into two sections, 10 2A, which is regarding changes to retail, and 2B, regarding 11 changes to institutional. 12 With respect to retail, our recommendation stands that we 13 should improve the accessibility of Rule 605 and 606 reports to 14 have a central public free place where those could be accessed. 15 We did have some panelist disagreement with that rule, given the 16 third party vendor availability. But we believe that this is 17 really a retail investor-focused perspective and that they do 18 not have access to those tools, nor should they have to pay for 19 what is supposed to be public documents. 20 The next section on expanding the role of 605 to require 21 every broker-dealer to report is unchanged from our preliminary 22 recommendation. 23 The next recommendation was one of a consideration as 24 opposed to an implementation recommendation. And that was 25 looking at centralizing report creation. So with the advent of 0058 1 CAT and the results of the tick size pilot, it should be 2 considered whether or not there's value in centralizing creation 3 of Rule 605/606. 4 Next were a series of recommendations about additions and 5 update elements and changes to support Rule 605 from a retail 6 perspective. Those remain unchanged from our preliminary 7 recommendation. 8 The next was relating to 606, and you'll note that the 9 proposal does include questions related to dividing, instead of 10 by listing market, by NMS stocks, dividing NMS stocks into S&P 11 500 and other. That recommendation of ours continues to stand. 12 Additionally, the proposal talks about segregating 13 marketable limit orders from non-marketable limit orders. 14 That's a recommendation we agree with in the proposal as well. 15 Finally, we agree with the proposal's requirement to 16 enhance payment for order flow data. And if recommendation was 17 to -- we would think that looking at the usability of those 18 disclosures would be an important factor. 19 Regarding our recommendations relating to institutional 20 order handling disclosures, we specifically focused on the 21 proposal's requirements and comments to those proposals. Our 22 first recommendation there is to eliminate the proposal's 23 requirement to provide order routing strategy based on 24 aggressive, passive, and neutral designations. 25 The thinking here was we should be guided by some 0059 1 fundamental principles. Those include consistency, awareness of 2 the differences between retail and institutional, and ease of 3 implementation. We believe that the subjective nature of the 4 passive, aggressive, and neutral designations would be an 5 impediment not only to consistency but also to implementation. 6 We also recommend providing clarity around the proposal's 7 requirement to provide data around actionable IOIs. It is our 8 understanding that conditional orders are not meant to be 9 included in the proposal, and that should be clarified, as well 10 as the fact that actionable IOIs should be defined as automated 11 and eligible for immediate execution. 12 Next is we agree with the proposal's definition that the 13 institutional customer is really the one who places the order. 14 And that's consistent with how we believe 605 and 606 work 15 today. 16 We believe we should establish consistency via a fixed 17 protocol of standardized dissemination of data via execution 18 reports. It's worth noting that there are broker-dealers who 19 use other firms' algos and other execution venues, other broker 20 dealers. They need to be able to have the information on an 21 execution report in order to effectively report in conformance 22 with the proposal. 23 We agree that the focus should be for the institutional 24 and NMS stocks, and that we could learn from that before going 25 on to options. And because directed orders are actually at the 0060 1 choice of the institutional customer, we believe those should be 2 excluded from the order handling disclosures that broker-dealers 3 make since that is not a true, accurate reflection of their own 4 order handling decisions. 5 That's essentially the recommendation. 6 MR. LUPARELLO: Thank you very much. Before I open it up 7 for questions or comments, just two quick comments on our side. 8 I'll reiterate what I said in response to Eric and his 9 Subcommittee's recommendations on limit up/limit down. I very 10 much appreciate that the Committee -- the world continues to 11 change during the course of deliberations, and in this case the 12 Staff's 606 proposal obviously is something that was 13 significant. 14 And the Committee continues to update and reflect upon new 15 information in terms of its deliberations and its 16 recommendations, which is obviously very difficult for you folks 17 to do, but only enhances the value of the information we get so 18 as a Staff, we really appreciate that. 19 The second, and not to commit any future Commission or 20 Commission Staff, but I think, as we think about recommendations 21 like this, we would probably think about them in a couple of 22 different contexts. Some of these could very well fold into our 23 thinking as we evaluate the 606 proposal in response to, again, 24 market changes and comments, these being very valuable additions 25 to that. 0061 1 Others, especially around the retail, could be things that 2 we would think about in a separate rulemaking context. So to 3 the extent to which that's helpful in your deliberations, I 4 think that's the way the Staff would probably look at this going 5 forward. 6 So questions and comments? Kevin? 7 MR. CRONIN: Manisha, just on 606, you say that you 8 support the definition of what an institutional investor is. 9 Correct me if I'm wrong, but I thought part of what the proposal 10 was, that the size of the order would determine whether or not 11 it was institutional. So are you suggesting that it's where the 12 order emanates from? That if Matt or I send an order into the 13 marketplace, that's always an institutional order, not a 14 4,000-share, 3,000-share, et cetera, kind of order? 15 MS. KIMMEL: No. So we made the distinction between 16 institutional order and institutional customer. So our thinking 17 about an institutional order is based on held/not held. But one 18 of the other terms discussed in the proposal was whether or not 19 it would be the beneficial owner who would be the institutional 20 customer as opposed to the entity who placed the trade. 21 And so in terms of who would get those customer 22 disclosures, we would think that the customer would be the one 23 who placed the order. So it was really referring to who is the 24 recipient of the report as opposed to whether or not it was 25 institutional or retail order itself. Does that make sense? 0062 1 MR. CRONIN: Yes. I guess where I'm going with this is 2 that we would want -- given the way that the orders are broken 3 down in the marketplace today, and really to the point, if it 4 appears to be a smaller order, it might be treated differently. 5 It may not get the level of insight that we would need to render 6 an opinion on whether or not we got best execution. 7 So my long-winded point is that I would hope that it would 8 be the individual account itself that would be the definition of 9 whether this is an institutional order or not. 10 MS. KIMMEL: Right. So that was another proposal, right, 11 that was discussed. It could be based on the account or it 12 could be based on order attributes. Where we went was order 13 attributes. And that was in response to some of the members of 14 the Subcommittee who get a lot of institutional order flow, 15 talking about the nature of that order flow being 99 percent not 16 held. 17 MR. CRONIN: Were there any institutions on your 18 Subcommittee? 19 MS. KIMMEL: No. 20 MR. CRONIN: Okay. Thank you. 21 MR. MECANE: Just one clarification on that, then. So is 22 the structure of the recommendations that 2A would apply to held 23 orders and 2B would apply to not-held orders? Is that the -- 24 MS. KIMMEL: That's right. Yes, exactly. 25 MR. MECANE: Got it. 0063 1 MR. RATTERMAN: Steve, this is Joe. There's a couple of 2 comments that I'd like to put in there from our retail meeting 3 yesterday, if that's all right? 4 MR. LUPARELLO: Yes. Of course. 5 MR. RATTERMAN: I think one general comment that we heard 6 loud and clear was certainly support for modernizing these 7 reports. But a general tendency towards less is more. Again, 8 complexity in terms of what we're presenting to the retail 9 customer and their ability to interpret it. It's possible that 10 you might go a little too far at times, and so just generally a 11 theme of, we definitely want to modernize, but generally less 12 can be more. 13 There was a specific comment or question needed for 14 clarification, under recommendation 2A, the third bullet point. 15 Is the recommendation of the Subcommittee that a third party 16 such as FINRA or some other party would actually be tasked with 17 creating all these reports, or simply the storage? And there is 18 certainly a lot of support from the retail brokerage team and 19 myself that having a central repository makes a lot of sense. 20 Having a central processor may not make as much sense. So that 21 was kind of a question and a comment. 22 And then thirdly, I think maybe we haven't gotten to 2B 23 yet, but the reaction from the retail group was, why is there 24 not a little bit more emphasis on granularity on the 25 institutional side as much as there is on the retail side? So 0064 1 those are my comments. 2 MS. KIMMEL: Yes. If I could just address the 3 centralization question. So the recommendation is for 4 centralization from the repository perspective. The 5 recommendation on creation is not a recommendation to centralize 6 creation, but to consider it. And primarily in light of two 7 years out or three years out when we have CAT, is there some 8 value we can get from that investment? 9 MR. RATTERMAN: Thank you, Manisha. 10 MS. KIMMEL: And it gets to the question on institutional 11 and more granular. I think because the proposal included a lot 12 of granularity, that was why we didn't specifically make 13 recommendations there. We did not oppose any of the granular 14 fields that were included in the institutional report that was 15 in the proposal. 16 MR. LUPARELLO: Jamil? 17 MR. NAZARALI: Yes. Just to echo Joe's points and add one 18 additional one. Our retail broker-dealer clients also expressed 19 a lot of concern with a recommendation that 606 include the 20 execution quality of the routing of the market makers that they 21 route to. The concern expressed was that there's a lot of 22 important criteria that go into that routing, and that that may 23 create a misleading -- it contains misleading information. So 24 they expressed that concern also. 25 MR. LUPARELLO: Brad? 0065 1 MR. KATSUYAMA: Yes. Just a comment on the "less is more" 2 angle. I think this goes back to Mark's point. There's a 3 certain level of disclosure that's not disclosing anything. And 4 I think that this isn't about solving for the lowest common 5 denominator of knowledge. This is about making data publicly 6 available so that experts can help people make better decisions. 7 8 So I think we're starting to see different types of group 9 pop up that consume this data, that turn it into usable reports. 10 So I wouldn't necessarily worry about scaling back for the 11 consumer as opposed to just disclosing what we think is the 12 adequate amount of information for people to make sensible 13 decisions, or at least to get informed in the right possible 14 way. 15 So there's lots of disclosure that doesn't disclose 16 anything. So I don't think we want to miss the mark here. 17 MR. LUPARELLO: Any other comments or questions? Gary? 18 MR. STONE: So in the proposal that was put out by the 19 Commission for 606, one of the things that we noted in our 20 common letter that we liked was the fact that -- or we suggested 21 was that the reports not be mandatory, that one of the ways you 22 actually find out whether or not the information is material 23 that people are using is they actually request it. 24 So as much as I would like to say the centralization of 25 the reports is important, the problem is then we lose the fact 0066 1 as to whether or not we actually have created something that is 2 used by the marketplace. And the reason why that is important 3 is because we layer on a lot of costs onto the marketplace with 4 these types of disclosures. But we never, ever check to see 5 whether or not they're actually valuable, and value is whether 6 or not they're actually being used. 7 And so I don't agree that FINRA should be the aggregator 8 of it. First of all, it should be the Commission, if it's 9 anybody. But I also don't believe that we should actually go 10 there now. We should actually find out what the reaction is to 11 the new reports because that's a valuable data point in itself. 12 MS. KIMMEL: That's fair. And actually, that 13 recommendation regarding accessibility is only with respect to 14 retail, 606 and 605. We did not make that recommendation with 15 respect to the institutional requirements. 16 MR. LUPARELLO: And to be clear, our silence here is not 17 consent to be the aggregator of those reports. 18 Any other comments or questions? Kevin? 19 MR. CRONIN: Just one more on this. So as you were 20 thinking about the different ways that you could cast the net to 21 try to pick up institutional orders versus retail, I can't think 22 of any reason offhand why I would ever send an order held into 23 the market in its current orientation, anyway. 24 Does that get you to largely where you would need to be to 25 really get the statistics that you need to have for 0067 1 institutions? Or is there something else, unique IDs in the 2 marketplace for institutions that you could use instead? Just 3 kind of curious on that. 4 MR. LUPARELLO: And actually, before you answer, can I ask 5 a question, Kevin? Aren't there times when you're going to send 6 an order that then is going to get broken up into a variety of 7 child orders that will be held orders? 8 MR. CRONIN: I think that to the first part of your 9 question is yes. They will be. Whether or not the broker sends 10 them as held orders or not, I don't know that I could opine. 11 MS. KIMMEL: Yes. To that point, we agreed with the 12 proposal that talks about the order is defined by the parent 13 order, not the child order. So we were talking about the parent 14 order being not held, agreed that it could be routed out as held 15 as part of an order routing. 16 To your question about the use of IDs, we discussed 17 basically that there was like three basic ways you could think 18 about this. One is the ID, like LTID. The other would be by 19 using the FINRA definitional account-based. And then the 20 held/not held. So we discussed all three. Where we ended up 21 was not held. That's where we ended up. 22 And it was in large put due to, from an implementation 23 perspective, if fundamentally not-held order flow was reflecting 24 institutional flow, then the implementation effort associated 25 with basing these reports off of order tickets. That's already 0068 1 on the order ticket. And that's why. That really was part 1 of 2 the reasons why held/not held was the recommendation from an 3 implementation perspective. 4 MR. LUPARELLO: So before I call for a vote, maybe I'll 5 make a suggestion that when considering your vote, you don't 6 assume that a vote in support is a vote in support for every 7 single sub-bullet. It's neither. It's sort of an implicit or 8 explicit support for all the sub-bullet recommendations, but 9 more a support for, as the Commission and the Staff considers 10 amendments to 605 and 606, that these are the elements they pay 11 special attention to during that deliberation. So if that's an 12 okay way to cast it, Manisha, I think that would be the way I 13 think we would receive it. 14 So with that, I ask for a motion. Did I see a motion? I 15 think I saw -- 16 MR. ANDRESEN: So move. 17 MR. LUPARELLO: Matt. And a second? 18 MS. O'HARA: Second. 19 MR. LUPARELLO: From Maureen. All in favor? 20 (A chorus of ayes.) 21 MR. LUPARELLO: All opposed? 22 (No response.) 23 MR. LUPARELLO: This one's unanimous. Thank you very 24 much. The Subcommittee's recommendation is adopted by the full 25 Committee and received by the Staff. 0069 1 We're making good time. We have the other Subcommittees' 2 reports. I'll look for whether folks want to take a quick break 3 before coming back to that or -- I have a vote for a break. So 4 why don't we take a 10-minute break and reconvene at 11:15? 5 (A brief recess was taken.) 6 MR. LUPARELLO: Seated and ready, the next order of 7 business is to provide updates on the NMS and Trading Venues 8 Subcommittees. And I'll ask the Subcommittee chairs, starting 9 with Kevin and the Reg NMS Subcommittee, to update the Committee 10 on the Subcommittee's deliberations. 11 MR. CRONIN: Thanks, Steve. So I think part of what we've 12 been trying to figure out is obviously with Rule 611. It's, we 13 think, a pretty big task to try to really dig into it and 14 provide the SEC and Staff with recommendations. 15 Given the clarity that we have now that the charter of the 16 Committee will be extended six months, I think we have 17 sufficient time to not only study but to make recommendations 18 around 611. So the Committee has spent the last couple of 19 meetings that we've had trying to figure out the priorities and 20 the approach, given whatever time frame we had. And I think 21 it's very helpful for us to understand again the extension. 22 And in fact, we have a meeting this afternoon. My 23 apologies to other Subcommittees who are unable to meet this 24 afternoon because we already took the time. But we will be 25 discussing Rule 611 very specifically, and we'll certainly look 0070 1 to have conclusive and firm recommendations at some point down 2 the road. 3 MR. LUPARELLO: Thank you. Any questions or comments from 4 folks not on that Subcommittee, Kevin or other Subcommittee 5 members? 6 (No response.) 7 MR. LUPARELLO: Great. Rick, Trading Venues Subcommittee? 8 9 MR. KETCHUM: I'll try to at least emulate, as well as a 10 lawyer can, Kevin's succinctness. But at the time that the full 11 Committee adopted our two recommendations with respect to SRO 12 regulatory matters, we noted that the Subcommittee was also 13 working specifically to consider recommendations in other areas, 14 including SRO liability rules, regulatory centralization, and 15 consolidated market data. 16 I first thank Maureen, who during my period of recusal was 17 specifically responsible for working with the Committee on the 18 regulatory centralization question. 19 We continue to look at all three. The Commission Staff 20 has been helpful, and we've distributed some of their efforts 21 from an analysis with respect to exchange liability rules, and 22 allowed us to have an updated and more fulsome review of that. 23 And I think we expect to meet very shortly to take advantage of 24 that data and look closely at the question as to whether we can 25 finalize and formulate a recommendation on those liability 0071 1 issues. 2 And we continue to go forward with respect to the 3 regulatory centralization question, though recognizing some of 4 the complexities on that that were raised in earlier meetings. 5 And on consolidated market data, we've begun to have 6 conversations with Kevin's subcommittee as well, and will 7 continue. Again, we believe that that is worthy for additional 8 effort. 9 So now that we find that our length is longer than a 10 nanosecond, we expect to continue to pursue reviews on all three 11 of those subjects. 12 MR. LUPARELLO: Any questions or comments for Rick from 13 members of -- from folks not on the Subcommittee? 14 (No response.) 15 MR. LUPARELLO: Great. And you did match Kevin in 16 succinctness. 17 So for next steps, as the Chair said and as you all know 18 because you all consented to a continuation of your outstanding 19 service, the Committee's charter has been extended for a minimum 20 of six months, which will allow a lot of this good work to 21 continue. We'll be following up with the Committee very soon 22 about scheduling a full Committee meeting for some point in the 23 first quarter. 24 I look forward to be sitting somewhere back there 25 critiquing the work of the Designated Federal Official as I go, 0072 1 and so look forward to the continuing work of the Committee, 2 this times looking at the backs of your heads instead of your 3 smiling faces. So I'm very much looking forward to the 4 continued work of the Committee. 5 And at this point I'll entertain a motion to adjourn and 6 allow the Subcommittee to have a little break before they dive 7 into their work. 8 Do I have a motion to adjourn? 9 MR. BROWN: So moved. 10 MR. LUPARELLO: From Reggie. Do I have a second? 11 Committee MEMBER: Second. 12 MR. LUPARELLO: All in favor? 13 (A chorus of ayes.) 14 MR. LUPARELLO: Thank you very much for your service and 15 your work. Thank you. 16 (Whereupon, at 11:28 a.m., the meeting 17 was adjourned.) 18 * * * * * 19 20 21 22 23 24 25 0073 1 PROOFREADER'S CERTIFICATE 2 3 In the Matter of: EQUITY MARKET STRUCTURE 4 ADVISORY COMMITTEE MEETING 5 File Number: OS-1129 6 Date: Tuesday, November 29, 2016 7 Location: Washington, D.C. 8 9 This is to certify that I, Christine Boyce, 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, 13 and that this is the original, complete, true and accurate 14 transcript, which has been compared to the reporting 15 or recording accomplished at the hearing. 16 17 _____________________ ______________________ 18 (Proofreader's Name) (Date) 19 20 21 22 23 24 25