May 26, 2020
Chair, SEC Commissioners, Committee Members, and Division Staff, thank you for the opportunity
to submit my comments:
Comments:
1) Off exchange trading at the NBBO creates disincentive to quote on lit venues because of the
adverse selection risk to lit quotes. This adverse selection against the lit quotes both forces
wider spreads, and thins lit book liquidity to compensate for the risk of quoting. This becomes
positive feedback loop as more volume is traded off-exchange to capture the wider spreads and
on and on.
2) If seventeen percent of lit exchange trades are against hidden orders posted between the NBBO,
then off exchange trading at the NBBO fails to provide best price execution at least some of the
time for all orders, and most likely, more than seventeen percent of the time for small retail
orders.
3) The idea has been introduced that internalized order flow benefits marketable retail orders by
avoiding maker/taker fees that effectively widen the spread. I posit that order internalization is
a net negative to retail orders given:
a. The wider spreads on lit exchanges due to the adverse selection premium that
forces marketable limit orders to pay more and sell for less than if the adverse
selection risk premium didnt exist.
b. Off exchange trading at the NBBO queue jumps the retail limit orders at the
NBBO thus reducing executions for retail non-marketable limit orders that
generally post to lit venues.
c. Retail resting limit orders on lit exchanges are subject to the adverse selection
that exists on lit markets.
d. Marketable limit orders internalized at the NBBO fail to discover the hidden
orders between the NBBO on lit exchanges that would provide price
improvement of the NBBO.
4) Lit quotes are sounder than unlit quotes for the purpose of pricing and for the purpose of
liquidity. A lit quote takes the risk of anonymous, on demand, counter party execution. An unlit
quote does not have stand up for any counter party execution. The public markets should
reward sounder quotes by executing them first. Public markets for public equities exist for
public participation in issuance and in investing. It runs counter to the purpose of public markets
that off-exchange trading, with no price improvement, can queue jump lit quotes.