The SEC's Director of the Division of Trading and Markets endorsed the Innovation Exemption, which the SEC approved on September 17. The exemption provides five years of conditional relief from the definition of an exchange for qualifying Tokenized Securities Venues (TSVs). The director said the exemption allows TSVs to use automated market makers for permissioned participants to trade tokenized National Market System (NMS) stocks. TSVs must be U.S. persons, operate on public, permissionless blockchains and comply with volume limits. Eligible tokenized NMS stocks must carry all the same rights and privileges as the underlying stocks. TSVs must give issuers of the underlying stocks an opportunity to object to trading of the tokenized stocks on the venues. The director said experience with tokenized stock trading in the United States will inform future division recommendations, including potential proposed rulemaking to integrate digital assets fully into market structure.
The director said the SEC proposed rescinding Rule 611, known as the trade-through rule, at an open meeting on June 11. The SEC also proposed changes to Rule 610(e) to allow locked and crossed markets. The division continues to analyze more than 1,200 comment letters, input from meetings and two public roundtables held last year. The director identified a consistent theme that including only automated quotes in the national best bid and offer is important to preserve that benchmark for execution quality. The director identified another consistent theme that any Rule 611 change must be coordinated with modernization of Best Execution requirements. FINRA issued a comprehensive request for comment on July 24 and held a Best Execution roundtable yesterday, the director said. The SEC's proposal also highlighted interactions between Rule 611 and Rules 610 and 612, covering access fee caps and minimum pricing increments, respectively. Chairman Atkins directed the division at the June 11 meeting to review both rules by year-end, the director said. The director said the review is well underway and the division fully expects to make recommendations alongside any change to Rule 611.
The director said commenters have called reform of the market data revenue allocation formula necessary and overdue. The industry is transitioning to a single market data plan, the CT Plan, scheduled to become operative next April. The director described the CT Plan as a division initiative launched under former Director Brett Redfearn that promises better governance, independent administration and greater responsiveness to industry needs. The CT Plan recently changed its revenue allocation formula, marking the first such action by market data plan participants, the director said. The director argued that additional formula changes can and should be made by the end of next year to encourage more displayed liquidity.
The director said some novel products fall under SEC jurisdiction, while others operate under joint SEC and Commodity Futures Trading Commission (CFTC) oversight. CME launched cash-settled single-stock futures on July 27, the director said. In September, the SEC received Forms 1-N from Coinbase, Kalshi, Bitnomial, NADEX and ICE Futures to register by notice as security futures exchanges. The director identified those venues as CFTC-registered designated contract markets. The director expects at least four exchanges to begin trading perpetual futures on securities sometime this quarter. The SEC approved Cboe's proposal yesterday to list binary security options based on key performance indicators associated with NMS securities, the director said. The director said the SEC's role is to ensure compliance and foster healthy competition to protect and benefit investors, rather than judge commercial prospects.
The director forecast that markets will soon operate 23 hours a day, five days a week, and likely 24 hours a day, seven days a week shortly afterward. The director described tokenization as promising technology still in the early stages of limited deployment. The director said Regulation NMS rules are under review at Chairman Atkins' direction. The director said prediction markets and perpetual futures are available across a broad range of traditional and novel exposures.
The director said Commissioner Hester Peirce left the SEC two weeks ago after eight and three-quarter years, the fifth-longest consecutive commissioner tenure. Peirce was the 12th woman commissioner and held the longest consecutive tenure of any woman commissioner in SEC history, the director said. Peirce warned in her final speech that excessive deliberation over legitimate technological risks could cause rejection of change in favor of the status quo. The director said the Security Traders Association's Women in Finance program held its eleventh annual symposium earlier today. The director credited the program's partnership with FINRA on licensing and continuing education reforms with delivering tangible benefits. The director urged market participants to maintain a clear distinction between investing and gambling and to serve and educate clients rather than exploit clients.