The Importance of Self-Regulatory Organizations

Operating our nation’s equity markets for more than 225 years, U.S. exchanges have developed robust regulatory capabilities that make them an important and necessary partner to the Securities and Exchange Commission (SEC). This invaluable experience uniquely positions the exchanges to fulfill their obligations as self-regulatory organizations (SROs), ensuring our markets operate fairly and efficiently in an increasingly complex global environment.

The Importance of Exchanges as SROs

The EMA firmly believes in preserving a securities industry regulatory model that encompasses exchange self-regulation supervised by the SEC. Exchanges operate in a highly regulated environment and with appropriate safeguards provided through SEC oversight, exchanges contributes to robust regulation of the securities markets.

Self-regulation of the securities markets and the professional participants in those markets is a cornerstone of the federal securities laws and is key to the effective monitoring of activity that may threaten market integrity or harm investor confidence. SROs conduct regular surveillance of trading activity and take appropriate disciplinary action against market participants that violate the exchange rules and federal securities laws. In addition, SROs:

• Implement market-wide circuit breakers and other curbs in the event of extreme price moves and high market volatility;

• Promote and monitor compliance by listed companies with exchange listing standards;

• Assess the regulatory background of individuals at trading firms before allowing them access to markets;

• Are responsible for examining their member firms;

• Administer and operate national market system plans mandated by the SEC; and

• Establish and maintain disaster recovery facilities.

The History of Securities Exchange Self-Regulation and SEC Oversight

Exchange SROs are a robust and necessary partner to the SEC. Financial markets are complex and diverse. Each exchange is the closest and most experienced regulator of activity on its own market, and is able to bring market-specific knowledge to bear. They investigate potential violations of exchange rules and federal securities laws, impose fines or other discipline on members who violate those rules, and routinely refer significant matters to the SEC for further inquiry.

Securities exchanges regulated markets long before the adoption of the federal securities laws. During their more than 200-year history, U.S. exchanges have adopted a range of rules governing their members and listed companies. Among other things, exchange member firms are subject to financial responsibility and trading rules, and listed companies are subject to initial and continuous listing standards including quantitative requirements and material news disclosure obligations.

Federal regulation of exchanges, and their formal recognition as SROs, followed the Great Depression and the enactment of the Securities Act of 1933 and the Securities Exchange Act of 1934 (the Exchange Act), which created the Securities and Exchange Commission (SEC). The Exchange Act sets forth requirements for the registration and regulation of national securities exchanges, and the main provisions for the SEC’s oversight of SROs are contained in Section 19 of that law. For example, exchange SROs are required to file any new rule or rule change with the SEC, and, in most cases, they must obtain SEC approval before the rule becomes effective. That detailed and often lengthy process includes filing with the SEC all proposed exchange rules and rule amendments that govern operations, including, among other things, listing and membership standards, order types and routing, trading conduct, and fees. Subject to certain limited exceptions, the rule filings are published for a public comment. The SEC may consider in its reviews of proposed exchange rules whether they are just and equitable, protect investors, and serve the public interest.

Financial Transaction Tax Resources

Financial Transaction Taxes Do Not Deliver

https://cdn.cboe.com/resources/government_relations/ftt-november-2017.pdf

A Financial Transaction Tax will Hurt All Investors

https://www.modernmarketsinitiative.org/archive/2018/11/13/this-is-a-test-post

How a Tax on Financial Transactions Would Simply Hurt the Middle Class

https://thehill.com/opinion/finance/484127-how-a-tax-on-financial-transactions-would-simply-hurt-the-middle-class

SIFMA: An FTT Amounts to a Sales Tax on Investor, Savers and Retirees

https://www.sifma.org/explore-issues/financial-transaction-tax/

Transaction Tax will cost U.S. savers, pensioners and ultimately hurt N.J.

Transaction Tax will cost U.S. savers, pensioners and ultimately hurt N.J. by Kevin. R. Edgar, Equity Markets Association, September 25, 2020

As New Jersey struggles under a large deficit due, in part, to the pandemic, some state legislators believe they have found a path toward fiscal health in a proposed financial transaction tax, or FTT. In reality, this is not a solution to the Garden State’s debilitating deficit. Rather, it’s yet another way to tax Main Street, in New Jersey and beyond. These days, especially, Main Street doesn’t need another tax.

The idea is to tax every trade done at “high quantity” data processors situated in the state. All of the major stock exchanges in the U.S., including Cboe Global Markets, Nasdaq and the New York Stock Exchange, have data centers in New Jersey, meaning the FTT will tax nearly every transaction in U.S. financial markets — no matter where the trade originates. Indeed, if the aim in New Jersey is to raise “tens of billions” of dollars,  then the FTT will ultimately be passed on to Main Street investors, the already overburdened average taxpayers with 401(k) accounts, savings accounts and mortgages.

Our members, which include Nasdaq, NYSE, and Cboe, have an obligation to obtain the best execution at the lowest possible cost. New Jersey’s approach will cost American workers and savers, will disrupt capital markets, and might be illegal. Ramming a tax through the legal process is no slam dunk.

The FTT would also be completely ineffective. Data processors are highly portable, meaning they can theoretically be moved anywhere in the U.S. Their current home in New Jersey is largely the product of an era when proximity to financial centers like New York was important.

Technology has changed that. All of the exchanges already operate multiple data centers. If the FTT were imposed, the ease with which exchanges could move them to a new location essentially means exchanges would be obligated to move their data centers as stewards of effective financial markets. Selecting the state with the lowest cost is part of an exchange’s duty to American investors.

Beyond that, it’s worth considering whether the FTT would work on its own terms. A President Barack Obama-era CBO study found transaction-based taxes to be ineffective as budget deficit reduction mechanisms, as they depend on volume and are, therefore, unpredictable. The fact that this FTT has not been included in the New Jersey state budget for fiscal 2021 is a tacit admission of this fact.

The FTT would likely also hurt New Jersey’s economy. Should these data centers relocate, it would cost the state meaningful jobs. It would also hit New Jersey’s public pension funds by increasing investment management costs, funds which already struggle under an estimated $70 billion in unfunded liabilities.

The FTT is a tax on the rest of the U.S., as well. Most prominently, it would hurt Main Street investors everywhere, especially retirees, who are dependent on market investments for income and returns from pensions and retirement accounts, which will decrease if the cost of trading is elevated. Further, the FTT would increase the cost of trading mortgage-backed securities and raise Treasury benchmark rates. This would likely make mortgage rates steeper for every homebuyer at a time they can ill afford it.

The FTT is far from innovative. It has been tried before — and failed. New York City implemented a financial transaction tax, but did away with it in 1966, even as it endured severe fiscal hardship through the 1970s. It has also been tried repeatedly, without success, outside the U.S. Sweden imposed such a tax twice, and regretted it both times, repealing it after liquidity fell and tax revenues were disappointing. France and Italy attempted it as well. Both saw a marked decrease in trading volumes, and Italy suffered a notable increase in volatility and trading costs as the bid-ask spread widened.

The FTT is a regressive tax that would not work for anyone. It would weaken capital markets, hurt New Jersey’s economy, and harm millions of investors across America who have savings accounts, retirement funds, and mortgages. It has been tried before and has failed to raise anywhere close to projected revenues. The U.S. needs a strong economy to recover from COVID-19, and now is not the time to implement a tax that will ultimately only land another low blow on retirees and American workers.

Kevin R. Edgar is counsel to the Equity Markets Association and counsel at BakerHostetler LLP.

Originally available at: https://www.roi-nj.com/2020/09/25/opinion/op-ed/transaction-tax-will-cost-u-s-savers-pensioners-and-ultimately-hurt-n-j/

An Open Letter From EMA to the SEC and Stakeholders

The U.S. Securities and Exchange Commission’s Roundtable this week on Market Data and Market Access is timely and welcome. 

We can all agree that, not unexpectedly, data and technology play a bigger role in the equity markets than they did when the foundational rules of market structure were established because all systems evolve over time, and it is appropriate for the SEC to periodically consider whether public policy is as well-tuned as possible to support our flourishing capital markets and protect investors. The Equity Markets Association appreciates the Commission’s sincere consideration of stakeholder input and advice, as evidenced by this two-day public meeting. 

Download the Paper →

Understanding the Market for U.S. Equity Market Data

Charles Jones of the Columbia Business School writes: “A stock exchange facilitates share trading, in large part by developing computer systems, rules, and processes that allow buyers and sellers to submit orders, trade with each other, and determine a market price for shares listed on those exchanges.  In the current market environment, this results in a vast amount of data, which market participants of all types rely on to make investment and trading decisions. Exchanges provide some of this market data to market participants at prices that vary depending on the type of data as well as how the data is used.”

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