On January 26, 2022, SEC Chairman Gary Gensler issued a brief statement noting the agency’s efforts to address the market volatility in January 2021 and beyond. The statement referenced the SEC staff report on volatility and market structure conditions and a request for comment related to digital engagement practices or “DEPs,” which we previously addressed here and here. Most notably, the Chairman remarked that he looked forward to the staff’s recommendations to address the conclusions noted in the report. The reference to “conclusions” is puzzling, given that the report amounted to little more than a secondhand retelling of events and a beginner’s guide to equity and option market structure basics.
As a reminder, the SEC identified four key areas in its report for further study (but again, no real conclusions): (1) forces that may cause a broker to restrict trading, (2) DEPs and payment for order flow (PFOF), (3) wholesalers and trading in dark pools, and (4) market dynamics of short selling. The SEC’s recent securities lending proposal was the first step in addressing some of the dynamics around short selling, and it appears to be the first of multiple proposals from the SEC to address the issues discussed in the report. The agency has also identified upcoming rulemaking related to short sale disclosure reforms and equity market structure modernization, including relating to order routing, conflicts of interest, best execution, market concentration, and the disclosure of best execution statistics. We will continue to monitor developments in this area.