Mar. 23, 2023
March 23, 2023
In regards to File No. S7-29-22 Release No. 34-96493 Disclosure of Order Execution Information.
Overall, I, as a household investor with a family, support this proposal and feel it should be implemented as soon as possible. That being said, every rule the SEC passes is only as good as the enforcement that backs it. Without active enforcement and severe and meaningful punishments for violations it won't matter what rules are implemented 'on paper'.
The Commission is proposing changes to rule 605 of Regulation NMS to include more information about broker executions.
On July 28, 2000, the SEC proposed SEC 11Ac 1-5, order execution statistics SEC 11Ac1-61, routing and material relationship aspects disclosures. The rules, now known as SEC Rules 605 and 606 were adopted in response to increasing competition and resulting fragmentation in the market. The SEC sought to assure investors that the U.S. National Market System continues to meet their needs by ensuring the practicability of Best Execution of all investor orders, including limit orders, no matter where they originate.
Brokers currently have to file 606 reports quarterly. Perhaps that frequency should be increased although I suppose that won't matter much if the reports aren't correct and accurate in the first place considering that FINRA, along with the SEC, sent out risk alerts in Dec 2022 regarding the lack of compliance with the 606 reports.
In the report FINRA cited a list of issues with the 606 reporting compliance. The findings consisted of firms publishing inaccurate information in the quarterly report on order routing, such as (these are not all the findings in the report):
1. Incorrectly stating that the firm does not have a profit-sharing arrangement or receive PFOF from execution venues
2. Inaccurately identifying reported execution venues as Unknown
3. Inaccurately identifying firms as execution venues (e.g., identifying routing broker-dealer as execution venue, rather than the exchange where transactions are actually executed)
There were also issues with Incomplete Disclosures Not adequately describing material aspects of their relationships with disclosed venues in the Material Aspects disclosures portion of the quarterly report, such as (these are not all the findings in the report):
1. Inadequate descriptions of specific terms of PFOF and other arrangements (e.g., average amounts of PFOF rather than specific disclosure noting the payment types, specific amount received for each type of payment, terms and conditions of each type of payment)
2. Inadequate or incomplete descriptions of PFOF received through pass-through arrangements
3. Incomplete descriptions of tiered pricing arrangements, including the specific pricing received by the firm.
One would suspect that brokers will be as non-compliant with the new 605 reports, and this will provide little to no benefit to retail. The 605 reports are only as useful as the accuracy of data it contains.
It is essential to provide clear guidance on how to read and interpret the data in Regulation NMS Rule 605 reports, especially for retail investors who may not have a deep understanding of the markets.
Best execution is important in trade execution for individual investors who may not understand the complexities involved in choosing how to execute a trade. Brokers owe their customers a duty of Best Execution derived from common law agency principles and fiduciary obligations, but it needs to become a rule that the SEC can enforce. Well, honestly, not just a rule that the SEC can enforce, but one that the SEC actually DOES enforce. There is a big and important distinction between CAN and DO and its the DO that is important here. The average American citizen CAN go to work, contribute to the economy, and pay their taxes, but the important part is that the DO. Its time for the SEC to do their part for the citizens, the market, and the economy, and not just the rich and corrupt.
Without the best execution rule, customers may not be aware of revenue arrangements between brokers and subpar trading firms or that they may be paying higher transaction prices. Additionally, conflicted orders don't belong in a Best Execution rule
Different trading venues may offer different prices, slower execution can lead to missed opportunities. Information leaks can inhibit a successful transaction, and less reliable settlement processes can delay receipt of proceeds.
Robinhood made misleading statements and did not disclose payments received for routing trades to specific firms and in December 2020, Robinhood was charged by the SEC with failure to satisfy its best execution obligation, resulting in an aggregate loss of $34.1 million for its customers. Citadel paid the SEC $22.6 million in 2017 to settle best execution charges for executing customer trades at less favorable pricing when a better price was available. Brokers recommending mutual funds with 12b-1 fees and revenue sharing arrangements with clearing brokers have also faced best execution charges from the SEC. Of course they continue to do business and commit violations. Another shameful example of how our nation caters to career criminals and fraudsters.
The proposed Regulation Best Execution is a necessary step in protecting household investors and promoting fair and efficient markets by ensuring that household investors are receiving the best possible execution for their trades. If its enforced at least.
Additionally, while not directly related to this proposal I would also like to state that I heavily wish to see action taken against FTDs (failure-to-delivers) that occur. I also wish to see actual justice in the markets, by which I mean closing of loopholes, as well as strong actions taken against fraud, abuse, and manipulation. By strong actions, I mean more than just insignificant 'cost of doing business' level fines and no need to admit guilt. I mean ACTUAL consequences. The kind of consequences that poor Americans face when they commit crimes
There needs to be actual enforcement and punishments that involve fines greater than the amounts profited from the crime. There needs to be severe consequences like prison time for the executives and CEOs that allow this, repayment to any and all affected parties / investors of an amount significantly greater than their losses. Those who commit crimes need to lose their ability to participate in the markets. Firms and institutions that regularly commit crimes need to be REMOVED PERMANENTLY from participation in the markets. Any regulators, politicians, or other cronies that were complicit in allowing these kinds of crimes to occur, such as those who aided in installing loopholes, exemptions, etc, also need to face fines, prison, and permanent removal from their positions and be banned from any other government positions in the future.
The above may seem harsh, but I fully feel it to be necessary. Poor Americans are punished in these ways. If I were to speed on the highway regularly I would face heavy fines, increased insurance costs, court hearings, jail time, temporary revoking of my driving privileges, and ultimately the permanent loss of my legal permission to drive a vehicle for personal or business purposes.
Our markets are extremely important to the health of our economy and our country as a whole. It would be no lie to say that market fraud is a serious risk to our national security and is immensely detrimental to the citizens whether they are active participants in the markets (such as in the form of household investors) or whether they are passive participants who are unknowingly victims of the crimes committed in our markets simply by working and having a 401k or pension.
As a further side note, any regulators or agencies that allow for such crimes to occur in our markets should be ashamed of themselves. Not simply due to their failure to honorably perform their job with the noble goal of protecting the citizens of this country, but for their failure to be worthwhile human beings in general.
I think its imperative that the Commission take these steps in order to start gaining back confidence and trust from the public
Sincerely,
Derek Lee
A household investor and typical American wage slave