Good afternoon. Jim [Toes], thank you for that kind introduction. It is a privilege to be with all of you today. Congratulations to STA on another year of record conference attendance and a top-notch program.Congratulations also on unmatched relevance to the industry during a period of innovation and rapid change for our Nation’s capital markets. This conference has long been a valued venue for policymakers and industry leaders to come together to find ways to improve our markets and benefit the investing public we both serve. Thank you for the opportunity to participate.
Please understand that I speak today in my official capacity as the Commission’s Director of the Division of Trading and Markets. These remarks do not necessarily reflect the views of the Commission, the Commissioners, or my Division colleagues.
The theme of your conference, “The Future in Focus,” is a timely choice. A quick survey of the issues with which you’ll contend today and tomorrow suggests that the future is coming very soon. Fundamentally, financial markets are dynamic, challenging, and full of surprises. But even by these standards, our industry is presently navigating a period of intense change. Reflection on similar periods in the past may provide salutary wisdom for the fast-arriving future.
Twenty-five years ago, the industry was in throes of profound reinvention. Markets were going electronic. Country-club-style governance that served legacy exchange memberships was being replaced by a for-profit model that incentivized competition, growth, and innovation. The NYSE was shaken by a leadership scandal.Price discovery now happened in decimals, after more than two centuries of fractions. Commissioner Cynthia Glassman, our sixth woman Commissioner, said the following at the STA’s 2003 conference:
“If this environment has taught us anything, it’s that we can no longer assume that the way things have always been done is necessarily the right way to do them. Doing a risk-based review of your business will put you and your firm in the best position to adjust quickly to changes in the regulatory environment, but more importantly, to do the right thing for your customers.”[1]
Turning back the clock another twenty-five years, we find another run of furious times during the early and mid-1970s. Both Nasdaq and the National Market System were born. The NYSE unfixed commissions. Standardized, exchange-traded options came to market via the CBOE, incubated by the Chicago Board of Trade. Your organization was then known as the “National Securities Traders Association.” Commissioner Roberta Karmel, the first woman Commissioner, made remarks at your 1978 conference. Commissioner Karmel said:
“I have long had a great respect for the securities industry.If the SEC deserves its reputation for being a good government agency, part of the credit goes to the industry that it regulates. That industry, which you represent, and the SEC are now at a critical juncture. We must recognize that our relationship to one another and the investing public has changed and we must respond appropriately and constructively to that change.”[2]
Returning to the present, you and your industry colleagues are working in similarly dynamic times. Markets will soon be 23-by-5 – then likely 24-by-7 not long thereafter.Tokenization is a promising technology in early days of limited deployment. At the direction of Chairman Atkins, Reg NMS rules of the road are under review. And a bevy of new products, including prediction markets and perpetual futures, are available across a vast spectrum of exposures, both traditional and novel.
Commissioner Hester Peirce left the Commission two weeks ago.Commissioner Peirce was the 12th woman to serve our agency in this capacity. Her tenure lasted eight and ¾ years, and I had the privilege and pleasure of working with her for her last 16 months. Hers is the fifth-longest consecutive tenure of any Commissioner – and the longest consecutive tenure of any woman Commissioner in SEC history. In her last speech, in her second-to-last week in the job, Commissioner Peirce observed:
“The introduction of new technologies likewise often not only inspires awe and excitement but also engenders fears and concerns as realities sink in. Even as people dream about a new technology’s possibilities, they also ask legitimate questions about its potential harmful consequences and the likelihood that bad actors will use the technology to menace society. These questions are good, but if over-cogitated, they will cause us to reject change in favor of the status quo.”[3]
Having drawn wisdom from three woman Commissioners, it is appropriate to congratulate you on your successful Women in Finance (WIF) program.I understand that STA WIF held its eleventh annual symposium earlier today, a testament to its durability and value.Its work to promote representation of women in STA’s leadership and conference panels is self-evident, and its partnership with FINRA to reform licensing and continuing education processes delivered tangible benefits. As a proud former colleague of Laura Delaney, the current Chair, and Courtney Papes, an incoming Co-Chair, I am confident that this record of success will continue.
I also understand from Jim that STA WIF’s first Chair, and now Chair Emeritus, was Christine Sandler, another former colleague and friend.Evidently, Jim scheduled the inaugural symposium at 8:30 a.m. on Friday morning – a notoriously inhospitable time for this event. Then-Chair Sandler advised that “women like to go out on Thursday night too, Jim.”And lo, for the next year the symposium was moved to the Wednesday lunchtime spot, where it has remained since.
Returning to current events, three recent SEC actions warrant the attention of this audience. First, the Commission’s proposal to rescind Rule 611, commonly known as the “trade-through rule.” Second, the Commission’s issuance of the Innovation Exemption. And third, recent actions concerning novel products and venues.
At an open meeting on June 11, the Commission proposed rescinding Rule 611, as well as making changes to Rule 610(e) to allow locked and crossed markets. The Division continues to analyze over 1200 comment letters, as well as input from a number of meetings and two public roundtables, held last year. Two consistent themes have emerged. First, including only automated quotes in the NBBO is an important step to ensure that it remains a central benchmark for execution quality. Second, coordination of any change to Rule 611 with modernization of Best Execution requirements is critical. Relatedly, FINRA issued a comprehensive request for comment on July 24[4] and held its own Best Execution roundtable yesterday.[5]
In addition, the Commission’s proposal highlighted the interaction between Rule 611 and Rules 610 and 612, which cover access fee caps and minimum pricing increments, respectively. At the June 11 open meeting, Chairman Atkins directed the Division to review both rules by year-end.[6] Our review is well underway, and we fully expect to make recommendations to the Commission coincident with any change to Rule 611.
Commenters have also suggested that reform of the formula for allocating market data revenue is needed and long overdue. The industry is currently transitioning to a single market data plan – the CT Plan – which is scheduled to become operative next April.A Division initiative launched under the leadership of former Director Brett Redfearn, the CT Plan promises better governance, independent administration, and improved responsiveness to industry needs. Ahead of operations, the CT Plan recently made changes to its revenue allocation formula—the first time market data plan participants have taken such action. By the end of next year, I believe that additional revenue allocation formula changes can—and should—be made to provide effective incentives to increase displayed liquidity in the marketplace.
Turning to tokenization, the Commission approved the Innovation Exemption on September 17. “Innovation without arbitrage” remains our watchword. I believe that a five-year, conditional exemption from the definition of “exchange” for Tokenized Securities Venues, or TSVs, that provide the use of automated market makers for permissioned participants to trade tokenized NMS stocks is a responsible step forward. Among other conditions, TSVs must be U.S. persons, operate on public, permissionless blockchains, and be subject to volume limits. They can only make available for trading tokenized NMS stocks that carry with them all the same rights and privileges as the underlying.Further, TSVs must provide issuers of the underlying NMS stock with the opportunity to object to trading of the tokenized NMS stock on the TSV. By facilitating trading of tokenized NMS stocks in the U.S., the marketplace will gain valuable experience with this novel technology. This experience will inform future Division recommendations, including potential proposed rulemaking to fully integrate digital assets into our market structure.
Beyond tokenized assets, a number of novel products have recently come to market. Some of these products are subject to the Commission’s jurisdiction, while others operate under joint SEC/CFTC oversight. A prominent example is CME’s launch of cash-settled single-stock futures on July 27.In September, the Commission received Form 1-Ns from five CFTC-registered DCMs – Coinbase, Kalshi, Bitnomial, NADEX, and ICE Futures – to notice register security futures exchanges. I expect at least four to begin to trade perpetual futures on securities sometime this quarter. And yesterday, the Commission approved Cboe’s proposal to list binary security options based on key performance indicators, or “KPIs,” associated with NMS securities. Our role is not to judge the likely commercial success or failure of these projects. Rather, we work to ensure compliance with our standards and to foster healthy competition, to best protect and benefit investors.
Novel products, innovative technologies, and even SEC rules come and go.But as Commissioners Glassman, Karmel, and Peirce advise, principles that guide people persist. Navigate these dynamic times with enduring principles in mind. One foundational principle is the necessary distinction between investing and gambling. A broker is not a bookie. Our capital markets are not a casino. You have clients to service and educate, not marks to size up and exploit.
STA’s motto is dictum meum pactum.Your word is your bond. May you meet that high standard today, tomorrow, and each day after for the rest of your careers – which I hope are long, prosperous, and fulfilling. And may our collective activities and actions be worthy of remembrance at a future STA conference during similarly dynamic times. Hold that thought for 2050. Thank you very much for your time and attention.