Awaiting the New Micro-Structure
In the past couple of weeks the US Securities and Exchange Commission (SEC) has kicked a few market features to the curb. First the regulator retired unfiltered, or naked, access. Then it voted to eliminate the practice of using stub quotes.
None of these come as surprise since the SEC has been telegraphing these reforms since the beginning of the year. Of course, the May 6 flash crash helped cement these decisions.
It's going to be interesting to see how the market is going to adapt to these changes. How many automated strategies and risk management applications will need to be re-tuned to handle the new market realities?
I doubt that the elimination of naked access will have a great impact on liquidity. However, the elimination of the stub quote is going to give many market markers a pause now that they have to provide two realistic quotes on both sides of the market.
Until participants learn the nuances of the new market microstructure, it's going to be a bumpy ride.
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