Today [October18], the staff issued a report on the so called “meme stock” episode that occurred this past January. We would like to thank the staff not only for their hard work on this report, but also for keeping the Commission fully and timely informed during the period of extreme volatility discussed in the report. While the report includes an interesting account of the events, it does not appear that many conclusions can be drawn from the data. This report should have been an anodyne report on the events of earlier this year and, if evident from the data, an assessment of the causes of those events. Surprisingly, the report turned into an account of those events awkwardly intertwined with discussions of market practices and policies that mirror Commission-level conversations unrelated to the specifics of January’s events. Including these discussions distracts rather than informs our understanding of the meme stock episode.
In the wake of an anomalous market event, it can be tempting to identify a convenient scapegoat and leverage the event to pursue regulatory actions without regard to the factual record. The report, however, finds no causal connection between the meme stock volatility and conflicts of interest, payment for order flow, off-exchange trading, wholesale market-making, or any other market practice that has drawn recent popular attention. Indeed, in our discussions about causes of the January episode, whether with staff or with market participants, we have seen no evidence that these practices were a cause of these events.
After the public has had a chance to consider the report, we look forward to a robust policy discussion. The rules governing the equity market are akin to the woven threads on a sweater.[1] Pulling too tightly on one thread typically loosens another, often in unintended and damaging ways. A full and fair consideration of both the operation of our complex equity market and previous Commission actions is critical to avoid pulling too tightly on the wrong thread.
For example, a discussion about payment for order flow must consider the cost savings it provides to retail investors as well as the regulatory regime we have in place to address potential conflicts.[2] Past Commission and staff statements acknowledged the many benefits wholesalers can provide to retail investors.[3] We should not neglect to do so in our current analyses of market structure. And finally, consideration of changes must take into account rulemakings that we have finalized recently. For instance, as acknowledged in the report’s otherwise odd discussion of the National ‘Best’ Bid or Offer, less than one year ago, the Commission took steps to narrow quoted spreads and require the display of better priced odd-lot quotations as a means to, among other things, improve the NBBO and promote best execution of retail investor orders.[4]
We always should be on the lookout for ways to improve our rules and our markets, but we must move with the utmost care to ensure we do not harm investors and impair markets that are integral to people’s lives and retirement, as well as the U.S. economy. Investors and issuers, whom the equity market is after all here to serve, deserve nothing less.
ENDNOTES
[1] See Elad L. Roisman, Remarks at the SIFMA Equity Market Structure Conference: The Dynamics of our Markets and the Changing Structure on which they are Built (Sept. 19, 2019), available at https://www.sec.gov/news/speech/roisman-remarks-sifma-equity-market-structure-conference-091919; Elad L. Roisman, Statement for Investor Advisory Committee Meeting (June 10, 2021), available at SEC.gov | Statement for Investor Advisory Committee Meeting.
[2] See, e.g., Payment for Order Flow, Final Rules, Securities Exchange Act Release No. 34902 (Oct. 27, 1994), 59 FR 55006, 55009 (Nov. 2, 1994); Securities Exchange Act Release No. 84528 (Nov. 2, 2018), 83 FR 58338, 58374-76 (Nov. 19, 2018); and Division of Trading Markets, Responses to Frequently Asked Questions Concerning Rule 606 of Regulation NMS, Issue 14: Arrangements Affecting Execution Quality at a Venue available at https://www.sec.gov/tm/faq-rule-606-regulation-nms.
[3] See, e.g., Staff Report on Algorithmic Trading in the U.S. Capital Markets (Aug. 5, 2020), 31, available at https://www.sec.gov/files/Algo_Trading_Report_2020.pdf; and Securities Exchange Act Release No. 90610 (Dec. 9, 2020), 86 FR 18596, 18747 (Apr. 9, 2021).
[4] Securities Exchange Act Release No. 90610 (Dec. 9, 2020), 86 FR 18596, 18611-20 (Apr. 9, 2021).
This statement was issued on October 18, 2021, by Hester M. Peirce and Elad L. Roisman, commissioners of the U.S. Securities and Exchange Commission.