A Path Forward for the U.S. Equity Market Structure

Well-functioning trading markets for stocks are critical to the U.S. economy because they promote the productive allocation of capital. They do so by establishing accurate prices for the shares of publicly traded companies and by enabling investors to efficiently enter and exit their investments. However, in recent years, a lack of understanding of our trading markets has fostered concerns that the markets are not functioning effectively for long-term investors. Some critics have even gone so far as to suggest that the equity markets are “rigged” against long-term investors.

The US Equity Markets: A Plan for Regulatory Reform” (“the Report”) addresses these concerns in two distinct ways. First, we seek to inform the public and policymakers about the U.S. equity market structure and evaluate its performance for U.S. investors and public companies. Second, we set forth twenty-six recommendations to enhance the performance of our equity markets. We note that the Securities and Exchange Commission (“SEC”) has the authority to implement all of our recommendations except for three that would require legislative change. These three recommendations are noted with an asterisk in the list below.

To inform the public about our trading markets, we have conducted an empirical analysis of U.S. stock orders and executions over the past twenty years. This research allows us to reach conclusions as to how investors and public companies are faring in today’s markets. Overall, we find that our trading markets are performing very well for long-term investors. For example, we find that our markets are highly liquid and that investor transaction costs, as measured by bid-ask spreads, brokerage commissions and price impact, are at record lows. Additionally, instances of extreme volatility have been infrequent and isolated, and can be addressed by our recommendations.

We also explain high frequency trading (“HFT”) strategies and “dark pools” and we review the academic literature on each. With regards to HFT strategies, we believe that they are best understood as modern variants of traditional market making and arbitrage strategies that have always existed in equity markets. These strategies can provide important benefits to markets—market making provides investors with liquidity and arbitrage improves the accuracy of stock prices. Our review of the academic literature on HFT strategies finds that they are generally associated with positive effects on market quality, particularly with respect to liquidity, price efficiency, and volatility.

With regards to orders that are executed in the “dark,” we find that dark orders are often executed at a better price than the best publicly displayed price. However, our review of the academic literature on the relationship between dark trading and market quality is inconclusive. A number of studies find positive effects from dark trading, such as lower transaction costs, while several others find that dark trading can have negative effects, including a reduction in the accuracy of stock prices. In addition, we explain the key rules that govern trading in the U.S. stock market and their policy goals. These rules were last comprehensively revised over a decade ago and since then, our equity markets have dramatically changed. We explain how.

Our recommendations to modernize the existing equity market structure rules are based on three underlying themes: (1) Increase transparency; (2) Strengthen resiliency; and (3) Lower transaction costs by enhancing competition. A list dividing our twenty-six recommendations into these three themes is included at the end of this statement.

We hope that dividing our recommendations into these three groups will clarify the order in which policymakers should address our recommendations. Indeed, we strongly suggest that the SEC promptly acts on our recommendations to: (1) Increase transparency and (2) Strengthen resiliency. We believe that the benefits of these reforms to investors and public companies are clear and significant. Furthermore, these reforms should face limited opposition, in part because they do not affect the existing competitive balance between exchanges and broker-dealers.

More specifically, the disclosure rules that apply to our equity markets are severely outdated, as they were implemented in 2000 when stocks primarily traded on the floor of an exchange. Enhanced disclosures by exchanges and “dark pools” would allow brokers to better identify the trading venues with the best prices. This will put more money in the pockets of investors, because brokers retain significant discretion about where they will send and execute a customer’s order. Brokers should also be subject to enhanced disclosure requirements so institutional and retail investors can determine whether their broker is getting the best prices for their orders.

Strengthening the resiliency of U.S. equity markets would also improve investor confidence by reducing the likelihood of events like the May 6, 2010 “flash crash” or the volatility seen on August 24, 2015 (when hundreds of stocks did not open on time, were subject to multiple trading halts after opening and traded at highly volatile prices). Indeed, most of the existing volatility controls are relatively new, and recent events have provided us with the information that we need to enhance them.

Finally, we expect that our recommendations to lower transaction costs by enhancing competition will be our most contentious recommendations. This is because certain of these recommendations are based on the view that stock exchanges have authorities that reduce competition and increase transaction costs for investors. Most notably, exchanges have control over the sources of market data. We therefore recommend that the SEC take incremental steps when possible. The use of pilot programs and independent studies could be especially valuable to ensure that these reforms have a solid analytical basis. Such an approach would promote both the effectiveness of the reforms and the legitimacy of the SEC’s actions.

In conclusion, it is our strong view that now is the time for policymakers to act in the best interest of long-term investors by unleashing the benefits of transparent, resilient and competitive equity markets.

CCMR Specific Recommendations[1]

Increasing the Transparency of our Equity Markets 

  1. The SEC should require that disclosures on new Form ATS-N are published in a standardized format.
  1. Required disclosures of registered exchanges should be revised to include trading volumes attributable to undisplayed (“dark”) order flow.
  1. Retail brokerages should be required to provide disclosures regarding execution quality for their customers. Relevant disclosures should include percent of shares with price improvement, effective/quoted spread ratio, and average price improvement.
  1. The SEC should require broker-dealers to provide institutional customers with standardized reports that provide order routing and execution quality statistics.
  1. Trading venue disclosures should include information about execution speeds to the millisecond.
  1. Statistical information for disclosures pursuant to Rule 605 and Rule 606 and disclosures regarding institutional orders should be submitted in only one format to facilitate comparison across trading venues and among broker-dealers.
  1. The SEC’s cost benefit analysis for the Consolidated Audit Trail did not determine whether the $2 billion in implementation costs and $1.5 billion in annual reporting costs for broker-dealers would be passed on to investors. Prior to finalizing the CAT, the SEC should conduct a publicly available analysis that evaluates the costs and benefits of the CAT, and applies the cost benefit analysis to ensure that the CAT is implemented efficiently, with costs allocated appropriately amongst the stakeholders.
  1. The SEC should pass a rule applying the order protection rule to odd lot transactions above a threshold dollar amount, instead of a threshold share amount.
  1. Broker-dealers should be required to disclose how access fees and liquidity rebates affect order routing practices and transaction costs for their customers.
  2. The SEC should require exchanges to publicly disclose revenues from the securities information processors (“SIPs”), the allocation of market data revenues among SIP Plan Participants and revenues from proprietary data feeds.
  3. The SEC should require exchanges to disclose performance data for the SIPs and proprietary data feeds to facilitate a comparison of the relative speeds with which investors can obtain actionable market data from each.

 Strengthening the Resiliency of our Equity Markets

  1. Thresholds for market-wide circuit breakers should be adjusted so that they are triggered when a pre-determined number of stocks or percentage of an index display extreme volatility by triggering their individual trading halts. 
  1. The SEC and the Commodity Futures Trading Commission should work together to harmonize the thresholds for market-wide circuit breakers in the stock market with the futures market.
  1. The SEC should establish uniform Limit Up-Limit Down (“LULD”) intraday price bands, instead of wider bands during the market open and close.
  1. The SEC should eliminate clearly erroneous trade guidelines by aligning them with the thresholds for LULD rules.
  1. The SEC should require mandatory kill switches on all exchanges for all exchange members.
  1. The SEC should clarify exchange regulatory trading halt procedures in the event of specific operational failures (e.g., SIP failure).

 Reducing Transaction Costs by Enhancing Competition 

  1. The surveillance and enforcement regulatory responsibilities currently assigned to SROs should be centralized to the extent practicable. The reorganization could include centralization at either the SEC or FINRA.* 
  1. The NMS Plan process should be revised so that exchange SROs do not have outsize influence in the rulemaking process. Representatives of exchanges, broker-dealers and investors should be permitted to vote on any NMS Plans.* 
  1. Once SRO surveillance and enforcement responsibilities have been centralized to the extent practicable, Congress should revisit the Exchange Act to reconsider exchange legal immunity. Exchange legal immunity should only be available for exchange regulatory functions unique to exchanges that cannot be effectively centralized.* 
  1. The SEC should implement a pilot program to evaluate the impact of a reduction in access fees and liquidity rebates on market quality and trading behavior. The structure of the pilot should generally conform to the framework proposed by the Equity Market Structure Advisory Committee Regulation NMS Subcommittee and leverage existing pilots as appropriate.[2] 
  1. After concluding the access fee pilot, the SEC should conduct a pilot program for reducing the tick size for highly liquid stocks. The pilot should include a control group and should not include a trade-at rule. 
  1. After requiring disclosure of exchange market data revenues, the SEC should adopt a “Competing Consolidator” model for data dissemination. As a first step to implementing this framework, the SEC should promote reforms in the governance and transparency of the current SIPs.
  1. The SEC should not implement a trade-at rule, as it could increase investor transaction costs without appreciably improving market quality. 
  1. ATSs should be allowed to limit access to their trading venues.[3] 
  1. ATSs should not be required to obtain pre-approval from the SEC before adopting trading rules.

[1] The below list divides our recommendations into three groups. We note, however, that the Report does not present our recommendations in these same groupings. This is because the order of the report is based on our explanation of the existing rules and not the themes underlying our recommendations.

[2] Citadel dissents from this recommendation.

[3] Citadel dissents from this recommendation.


A pdf of the full report can be found here.


The Committee on Capital Markets Regulation is an independent and nonpartisan 501(c)(3) research organization dedicated to improving the regulation of U.S. capital markets. The Committee’s membership includes thirty-five leaders drawn from the finance, investment, business, law, accounting, and academic communities. The Committee is chaired jointly by R. Glenn Hubbard (Dean, Columbia Business School) and John L. Thornton (Chairman, The Brookings Institution) and directed by Prof. Hal S. Scott (Nomura Professor and Director of the Program on International Financial Systems, Harvard Law School).