Proposals
The Securities and Exchange Commission on Thursday proposed four rules that would influence securities trading if approved.
In sum, the rules represent what would be the biggest stock market reforms in the United States since the SEC rules changed. made in 2005. They have also raised questions among industry associations, who all agree that the proposals would bring major changes to the way shares are bought and sold, but do not yet have dissenting views on whether to support the changes.
The first, known as “best executionwould require brokers/dealers to exercise due diligence in identifying the best market and price for their client under current market conditions when trading securities. Brokers/dealers must also maintain or institute policies to ensure that they execute trades on the most favorable terms for their clients.
Under this rule, brokers/dealers must also document their compliance with the best execution standard for “conflicting transactionsin which a broker/dealer executes an order as principal; routes or receives an order from an Affiliate; or provides or receives payment for the order flow.
The second proposal aims to improve disclosure of order execution. The proposal would increase the number of entities that must produce monthly quality of execution reports to include “brokers/dealers with a greater number of clients”. It would also require new measures of execution quality, such as “average effective quoted spread” and “a size improvement benchmark”.
The third proposal would change the minimum price increases for National Market System (NMS) stocks from a whole penny to increases of less than a penny.
The last proposal requires certain retail orders to be subject to a fair bidding process before being executed. Retail orders normally go to wholesalers, who typically don’t have a competitive pricing process and simply execute at the best price available at the time, according to the SEC.
The proposal would require narrow competition malls, such as wholesalers, to auction orders for a time period of 100 to 300 milliseconds before executing the transaction. This process is designed to find a better price for the retail investor by allowing institutional investors to bid on the order. It could also potentially increase trading between retail and institutional investors, since the current market structure limits their contacts, according to the SEC Fact Sheet. The SEC estimates this could provide $1.5 billion in pricing benefits to retail investors.
Ken Bentsen, president and CEO of the Securities Industry and Financial Markets Association, said in a statement that the proposed rules are very complex and that industry will need a lengthy comment period to properly review the proposals.
A spokesperson for the Investment Company Institute said in an emailed statement: “A reduced tick size could be a sensible first step towards reducing tick-limited stocks and promoting competition. We will consider the proposal to assess whether the proposed price increases represent the most effective means of achieving these objectives. These are important proposals with far-reaching implications for securities markets and investors. ICI looks forward to reviewing the proposals, including the interplay between the four proposals and their cumulative impact.”
Adoption
The SEC has also adopted a new rule at the regulatory hearing insider trading, by unanimous vote. The new rule requires a “cooling off” period for plans in Rule 10b5-1.
Some insiders use 10b5-1 plans, which allow officers and directors to trade their own company’s stock with liability protection against insider trading. Since executives generally have access to non-public information about their company, the trades they execute on these stocks may therefore be suspicious.
10b5-1 plans allow an insider to pre-define parameters, such as price and date, in which company stock should be bought or sold, so that trades are put on autopilot. Since the parameters are defined in advance, the plan can be used as a defense against the accusation of insider trading, since the executive did not possess material nonpublic knowledge at the time the parameters were defined and does not would therefore not have been able to inform the trades. In the question.
However, the previous rules did not have a cooling-off period, meaning an insider could set the parameters just before they intended to trade shares anyway, although many companies require a period of reflection.
The new rules now require a three-month period to pass before transactions can take place under a 10b5-1 plan for officers and directors, to ensure that the plan itself n ‘was not informed by inside information and ideally to prevent abusive and suspicious transactions. .
10b5-1 plans are not required for insiders to trade in company stock, but they can provide an affirmative defense against insider trading. Employees who are not directors or officers would only have to wait 30 days before trading under a 10b5-1 plan.
“The SEC amendments will better protect public investors against misuse of these plans and build confidence in corporate management teams and capital markets generally,” said Amy Borrus, executive director of the Council of Institutional. Investors, in an emailed statement.
Key words: broker, execution, Insider trading, SECOND, trade