Citadel Securities just presented the SEC with a white paper that outlines “concrete policy recommendations covering the following important markets,” knowing the securities regulator is currently assessing financial market existing and possible, new financial regulation.

The alternative investment manager based in Miami, Florida, outlines measures it says are designed to enhance market efficiency, resiliency, competition, and transparency.

Citadel says in the paper that there are several areas that could use some enhancement, especially in light of market structure and technology changes. Those include decreasing the the regulatory costs associated with transacting in our markets, modernizing key regulatory frameworks (such as those that apply to self-regulatory organizations (SROs) and to alternative trading systems (ATSs).

Some recommendations

Citadel stresses that significant structural changes are not warranted, since some improvements have recently been instituted, such as the shortening of the settlement cycle and updating execution-quality disclosures. But it has some targeted recommendations, including:

• Amending the recent Tick Sizes and Access Fees Rule in a few ways, but mainly by defining “tick constrained” more narrowly and conducting a two-year pilot program to assess the impact of reducing the minimum quoting increment to half-penny for the 200 most liquid symbols.
• Adjust the growth of “private rooms,” where a single firm can trade with designated counterparts to the exclusion of everyone else. These rooms operate on alternative trading systems and appear to exist in violation of the SEC’s rules governing such trading systems, known as Regulation ATS, Citadel says. Since these systems now account for more than 10% of total market volume, Citadel suggests that Regulation ATS be revisited.
• Fixing the Consolidated Audit Trail (CAT), now one of the largest market surveillance database in the world and a source of concern to certain parties for representing “wasteful government spending,” having “ineffective governance” and presenting “data privacy and cybersecurity concerns.” Quoting SEC Commissioners Hester Peirce and Mark Uyeda, Citadel noted that CAT operates as a program funded by American taxpayers but outside the direct oversight or authorization of Congress. Citadel asked that the SEC halt the payment of CAT fees pending a comprehensive review. (Author’s note: Citadel is currently using the SEC in the Eleventh Circuit Court of Appeals to prevent it from enacting a plan that would require broker-dealer firms to foot a large part of the CAT’s continued construction.)
• Build on improvements to the disclosure of execution quality information, including the revisions to Rule 605 and recent (yet to be implemented) revisions to Rule 605. Citadel recommends rescission of the “costly and ineffective” reports that require broker-dealers to store significant amounts of data regarding how each “not held” order is routed and executed that must be made available upon request (but are infrequently requested in practice).
• Asking SROs such as stock exchanges to unmask what it says are “professional traders disguising themselves as retail customers” — doing so to take advantage of programs that give retail customers order execution priority, Citadel states. The current retail order definition used by exchanges, it says, “contains loopholes and lacks efficient enforcement.”
• The paper called on the SEC to spell out when a crypto token meets the definition of a security, and asked it to ensure that US broker-dealers and exchanges have the necessary regulatory clarity to trade, settle, and custody digital assets in a uniform manner irrespective of whether they qualify as “securities.” The ongoing series of crypto roundtables that the SEC has been running in person and online have offered an opportunity for greater clarity to arise.