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Dec 15, 2022
Why Wall Street Is Clashing Over the SEC’s Stock-Trading Overhaul
(Bloomberg) -- A planned overhaul of US stock-trading rules was greeted with skepticism by some financial firms that said, essentially, “If it ain’t broke don’t fix it.” Other traders welcomed the proposed changes and their promise of greater transparency and improved access to markets for investors.
The Securities and Exchange Commission laid out more then 1,000 pages of proposals on Wednesday that Chair Gary Gensler said would boost competition in equities markets. The changes would affect everyone, from wholesale firms that process orders to exchange operators and retail brokers.
Among other things, the proposals would require market participants to engage in auctions for the right to process many orders within milliseconds. They could lead to more stock orders filled on exchanges such as Nasdaq and the New York Stock Exchange, rather than by wholesale brokerages.
“There are real conflicts” in the current market model, Gensler said in a call with media. “Our job as an agency is to look at a national market system that drives to greater competition and efficiency.”
The agency’s three Democrats led by Gensler supported the proposals during a marathon meeting that spanned more than five hours. The SEC’s two Republicans opposed some of the measures.
Ahead of a public comment period that will continue through March, initial reactions are rolling in:
“Over the past 20 years, competition, innovation and thoughtful regulation have saved retail investors billions of dollars by increasing access and transparency and significantly lowering trading costs,” David Millar, a representative for Citadel Securities, said in an emailed statement. “The U.S. equity market is the envy of the world, and any proposed changes must provide demonstrable solutions to real problems while avoiding unintended consequences that will hurt American investors.”
“Some of the SEC’s proposed changes stand to resurrect discriminatory barriers to entry and hurt millions of retail investors. The SEC should not be playing politics with individual Americans’ ability to improve their financial lives,” said Lucas Moskowitz, deputy general counsel at Robinhood Markets Inc.
“The comment period is insufficient for the public to meaningfully comment on a package of this size and complexity,” he said.
Virtu Financial Inc.
The company sued the SEC last month to get more information about the plan, saying “national securities market participants and retail investors deserve information about the rulemaking process, including the sources of information received by the agency and the possibility of bias.”
Virtu declined to comment on the proposal released Wednesday.
“Greater transparency proposed by the SEC will be beneficial to retail investors,” Larry Tabb of Bloomberg Intelligence said. “However, narrowing tick sizes and access fees too much can backfire as it can make it harder for investors to trade in size.”
“The most worrying aspect of this proposal is forcing retail orders into an exchange-based auction, which may work for the most-liquid stocks, but could hurt the execution of less liquid orders dominated by retail investors,” he said.
“Nasdaq believes in transparent, fair, efficient, competitive and inclusive markets and we support iterative and data-driven regulatory changes that advance these goals,” a spokesperson for the exchange said in a statement. “US capital markets are resilient and well-functioning.”
“The current US approach to market structure has been forged by industry participants and overseen by regulators over many decades, and delivers the best outcomes in the world for retail investors,” Mayura Hooper, a spokeswoman for Charles Schwab Corp., said in a statement. “While we are always open to making things better, we strongly believe structural changes should be thoroughly vetted to ensure any benefits genuinely outweigh the risks of degrading individual investors’ experience.”
New York Stock Exchange
“The NYSE supports equity-market structure reform to benefit public investors and we are encouraged that the SEC’s proposals aim to level the playing field between on- and off-exchange trading,” said Michael Blaugrund, the exchange’s chief operating officer.
“These rules threaten to take away the entire ecosystem that exists today and replace it with the unknown,” said Adrian Griffiths, head of market structure at MEMX LLC, known as Members Exchange.
“MEMX has made various data-driven recommendations for solving targeted inefficiencies in equity market structure, including important issues related to tick size and round-lot constraints,” he said. The SEC proposals “address some of these issues.”
The reforms “represent a constructive and positive effort to improve transparency, increase competition and ensure that investors can access the best prices available in the market,” IEX Group Inc. co-founder and President Ronan Ryan said in a statement.
“It has been 17 years since the existing equity rules were adopted, and since that time, the stock market has seen significant change – including the advent of high-frequency trading, a dramatic decline in displayed liquidity on exchange and a substantial rise in off-exchange trading,” Ryan said. “Modernizing regulation ensures that market competition among brokers, market makers, and exchanges continues to benefit investors.”
“There could be hidden consequences of change that we are not aware of,” Interactive Brokers Chairman Thomas Peterffy said. “These markets work. We can’t foresee problems that might emerge.”
“More disclosure is certainly good,” he said. “But I think better disclosure is even better. Putting out reams and reams of paper that no one can digest doesn’t get you anywhere.”
“The auction proposal overlooks and tinkers with time-tested market attributes of price discovery that have greatly improved trading for retail and institutional investors, as far as bid-ask spreads and dependable liquidity in times of volatility,” Modern Markets Initiative Chief Executive Officer Kirsten Wegner said.
“It appears that the SEC’s rule changes may be placing unnecessary requirements on market participants, who may desire to operate an auction,” Apex Fintech Solutions CEO Bill Capuzzi said in a statement. “The proposed rule changes are in direct conflict with the SEC’s stated goals of greater competition and a level playing field.”
The plans “will undermine the brokers’ accountability and ability to innovate on behalf of their customers’ execution quality and investment experience,” he said. “Brokers will not be able to enforce requirements from counterparties, like response rates for all/certain ticker symbols.”
Select Vantage Inc.
“I applaud the SEC in proposing enhanced competition for segmented orders,” CEO Daniel Schlaepfer said. “This is a step toward what retail investors in Canada and other non-US stock markets have enjoyed for years — greater order exposure to lit markets where all can compete equally for trade executions. If done right, execution quality should improve for all investors.”
Ian Bandeen, chairman of SVI’s advisory board, said “reducing the minimum pricing increment to a 10th of a cent is an excellent move,” adding that “the now expanded public markets will quickly determine the true bid/ask spread for individual stocks going forward.”
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