Red tape reform: What’s next for US equity market structure?

President-elect Donald Trump spent his last presidency rolling back Obama regulations, and this time round will be no different. In 2017, he promised to cut two regulations for every new one, and in 2024 he has doubled down on this with plans for “the most aggressive regulatory reduction” in US history – placing financial markets in the eye of the storm.

As new faces line up to take key seats in the Trump administration, a prominent casualty is likely to be Securities and Exchange (SEC) chairman Gary Gensler, who has wielded enormous influence on the evolution and protection of markets (and investors) in the US.

Since his appointment by Joe Biden as SEC chairman in 2021, the former Goldman Sachs banker has been on a mission to enforce and update capital markets regulation. A key figure in the creation of landmark reforms such as Sarbanes-Oxley, Dodd-Frank and the Libor prosecutions during his tenure as commissioner of the Commodities and Futures Trading Commission, Gensler’s aggressive anti-crypto stance has given him villain status among the “crypto bros”, many of whom funded the Trump campaign to see him ousted.

Ousted he will almost certainly be. Although Gensler’s term runs until 2026, “there's a strong possibility that Gensler will be replaced, which could pave the way for a more lenient regulatory stance,” said Robert Miller, global head of market structure at brokerage firm Kepler Cheuvreux.

The macro implications of a Trump administration – relaxation of antitrust scrutiny, reduction of capital requirements, lax Basel III enforcement – are well documented. Veteran Wells Fargo analyst Mike Mayo called it a “regulatory gamechanger” in a research note last week, noting that a Trump administration will mean “more free markets, less harsh oversight”, reducing regulatory risk and boosting investment banking revenues.

But what of micro market changes? In the wake of 2021’s meme stock scandal, Gensler and the SEC instituted a wave of market structure reforms designed to update the “plumbing” of the stock markets to protect consumers and lower costs for investors. Sitting under four key pillars – best execution, enhanced order competition, improved disclosure and reduced tick size – the new requirements were met with a mixed reaction, with many expressing vehement opposition.

“The SEC’s equity market structure proposals are far reaching and raise serious concerns,” stressed the Securities Industry and Financial Markets Association (SIFMA), an industry body representing securities firms, banks and asset managers, in a 2023 objection letter. “Rather than promote competition and protect investors and the public interest, [it] would harm competition among trading centres and make markets less efficient and less innovative.”

Republicans, too, were furious at the proposals. “The US has the most liquid and efficient capital markets in the world,” said Congressman McHenry, who took over as chair of the house Financial Services Committee in 2023. “Gensler’s market structure overhaul, especially his untested proposal routing retail orders to auctions, will inject uncertainty and threaten the dominance of our markets that millions of Americans rely on for their financial security.”

In June, the capital markets subcommittee of the House Financial Services Committee held a hearing on SEC chair Gensler’s equity market structure reform proposals billed as “Solutions in Search of a Problem”, which discussed dismantling the programme – a move that, under Trump, could now become a reality.

“The Trump administration is likely to take a less prescriptive, more disclosure-based approach to capital market reforms, in contrast to the control-based measures proposed under the outgoing SEC chair Gary Gensler,” US regulatory expert Mark Davies, CEO of compliance and trade analytics firm S3, tells Euromoney.

Two of the reforms have already been passed unanimously by the SEC, one of which is unlikely to be revisited. Rule 605, formally and unanimously adopted in March 2024 with a compliance deadline of December 2025, is the least controversial, designed to protect end-investors by increasing disclosure requirements on execution data. With broad industry support, the refresh was seen as long overdue, resulting in better metrics, more data and improved market transparency.

The new tick size regime, which adds a smaller tick size to certain symbols, is also “likely to move forward under Trump” suggests Davies, although its most controversial aspect – a reduction in the fee cap charged by exchanges – may face scrutiny. US exchanges including Nasdaq and Cboe Global Markets last month lodged a petition with the US Court of Appeals to review the SEC reform, which passed unanimously last month and requires exchanges to lower fees charged to brokers to access prices. The rule “threatens to worsen outcomes for investors, listed companies, and the US equity markets,” claims Nasdaq.

“The current fee cap is 30 mils (or US$0.003 per share), and in this regulation the SEC has reduced it across the board to 10 mils,” says Davies. “That’s a controversial piece.” However, while the exchanges have mounted legal challenges (with the notable exception of NYSE, the US’s largest stock exchange), most other players were happy enough.

“The bi-partisan unanimous vote could make it harder on the next SEC administration to stymie the new rules,” says Eric Stockland, co-head of global electronic trading at BMO Capital Markets. “Our perspective is that the final rules are in a better place than what was originally proposed,” he adds, whilst noting that pending litigation is still one to watch.

The proposed reforms to best execution and order competition, both highly controversial and opposed, are where the battle lines are likely to be drawn.

The SEC’s proposed Regulation Best Execution seeks to establish a regulatory framework for brokers, dealers, government securities brokers, government securities dealers, and municipal securities dealers – not yet covered by SEC legislation. The goal is to create transparency across venues, both lit and dark, on-exchange and OTC.

Although seemingly logical, it has failed to gain traction, given it places heavy additional requirements on brokers, and not least because the best execution requirement is already covered by the US brokerage and exchange regulator, the Financial Industry Regulatory Authority (FINRA).

“The rule will probably get killed, simply because it’s not needed,” agrees Byron Griffin, head of market structure at financial services group ODDO BHF.

Gensler’s proposed enhanced order competition rule is a whole other ball game. According to the SEC, it should “level the playing field” across different parts of the market, including wholesalers, market makers, liquidity providers, dark pools, and lit exchanges, by creating a new order mechanism for retail trades, requiring them to go to public auction.

“The markets have become increasingly hidden from view, especially for individual investors. These individual investors don’t have the full benefit of various market participants competing to execute their marketable orders at the best price possible,” says Gensler. The new rule, the SEC believes, would result in “significantly better” prices for retail investors. The US market structure leaves an estimated annual shortfall of up to $2.3 billion, according to the commission.

The industry, however, vocally disagrees. “It was almost universally loathed,” says Davies. “It places a level of control onto US markets that hasn’t been there before, which would drastically affect the way retail trading is conducted.”

Of all market structure reforms, the enhanced order competition rule seems least likely to come to fruition – as US financial firms heave a sigh of relief. “Even prior to the election, many thought these rules would take less priority,” says Stockland.

Looking ahead, the Trump administration is set to continue its industry-friendly approach, which should play in favour of an expansionary equity market. Dan Gallagher, chief legal officer of Robinhood Markets (one of the firms most impacted by the post-meme stock Gensler crusade), is frontrunner to win the SEC chair, which would bode well for a more lenient stance for market structure.

That doesn’t mean firms can relax. Banks and brokers should still be on the lookout for further adjustments as the new administration seeks to put its own stamp on the market. “We anticipate tweaks in our market structure, be it existing or proposed rules,” says Stockland.

Firms should also look out for any change to the order protection rule (OPR), for example. Designed to prevent trades executed at prices other than the best-quoted for that security, it isn’t well loved by sell-side firms, for whom it substantially increases compliance and technology cost. “In the US, we have 16 exchanges, with three new applications pending. The cost to trade continues to increase and our requirement to connect with all these venues under OPR has been a topic of discussion,” warns Stockland.

The expected shift in regulatory philosophy is likely to have significant implications for US equity markets – and by extension, US banks. “A more deregulated, disclosure-based approach to equity market structure will certainly benefit the US in terms of global competition,” confirms Davies.

“Deregulated capital markets mean increased investment – a US market on steroids. This might mean increased inflation and a few nerves around rate hikes, but from a brokerage perspective it’s not going to be bad for the banks at all,” points out Griffin.

“Either way, the US IPO market is going to get a huge boost, and Europe will have to work hard not to fall further behind.”