Mar. 07, 2023
March 7, 2023 Dear SEC / Other market participants, I am a retail / individual investor and I wholeheartedly support this rule proposal (S7-31-22). Prior to discussing any arguments, counterarguments or suggestions for this specific proposal I would like to emphasize the following with my unique perspective as a retail investor of which many of these rule proposals are addressing: - I DO NOT feel protected as an investor in the current market system - I DO NOT believe I am fairly represented by retail brokerages / market makers or large exchanges when handling my orders or in the public comments provided for these rule proposals - I DO NOT feel I as an individual am provided with sufficient transparency to allow me to instigate my own informed decisions on where best to place my orders or who provides me the best execution - I DO NOT feel I am receiving economically viable price improvement on my orders - I DO NOT feel I am receiving best execution on my orders and feel I am being scalped at the benefit of retail-orientated organisations for their benefit, not mine For the remainder of this letter I have segmented my response into the following: - Why do I agree with this proposal? - What are some counterarguments to this proposal? - What changes or improvements can be made to this proposal? - Final thoughts Why do I agree with this proposal? To my understanding this rule prohibits individual orders from being internalised prior to the order being exposed to order-by-order competition at a qualified auction/lit exchange. I believe of the 4 rule proposals, this rule is the most important in protecting retail investors and encompasses all of the SECs mandates of protecting investors, allowing fair, orderly efficient markets facilitating capital formation. As a retail investor I am appalled by the fact that my several broker-dealers route orders to wholesalers to be internalised rather than reach the lit exchange / markets, that are available to other market participants. When I order through my brokerage app or via the online brokerage account I am not provided a choice to decline routing to a wholesaler. There is even evidence from other retail investors that even when a specific market/route is requested, the order still gets routed through a wholesaler first. This particular scenario even includes large broker-dealers such as Fidelity (specifically in relation to routing to IEX for $GME). My compensation for segregating my order away from well regulated exchanges with multiples more competition is price improvement in the order of a few cents. It doesnt take much knowledge to understand that I am being fleeced at the benefit of wholesalers who do not publicly have to display all of their bid-ask quotes. This is not mentioning that these wholesalers have numerous significant advantages. As quoted by the SEC two wholesalers cover over 66% of retails orders, with a total of 6 competing wholesalers. This fits the Oxford Languages definition of a duopoly a situation in which two suppliers dominate the market for a commodity or service. This allows them significant access to a majority of retails orders with significantly reduced adverse selection costs compared to other market orders huge informational advantage as they can analyse large retail trends that they can capitalise on. In addition some of these participants have access to high frequency trading (HFT), able to place trade orders faster than the orders can even reach some exchanges, altering the available quotes on the market at times of execution. The ability for wholesalers to accept / reject orders in itself is borderline manipulative as they control such volumes of retail orders they can actively impact the displayed quo te on lit exchanges by selectively choosing which buy/sell orders to reach the lit exchanges. This level of power deigned from providing cents of price improvement to retail investors is insane. I would happily pay the few cents per share if it prevented my orders from being fleeced. A common statement provided by these broker-dealers is that retail investors enjoy commission-less trading secondary to these wholesalers/PFOF. This is a misrepresented argument as from my experience as a retail investor these commission fees are hidden via other methods such as increased spreads compared to the lit exchange/quoted price, artificially increased Fx rates on depositing cash into the account or excessive withdrawal rates when attempting to access your money. If the broker-dealer provided the option to pay commission to have meaningful price improvement true access to the lit exchange, I would pay. Even without commissions there is questionability in whether these internalised orders are even fairly accounted for. A prominent case that is likely to have inspired the SECs recent efforts is in relation to the events of GameStop. In January 2021, Robinhood a retail broker prevented buying of GameStop shares but not selling shares, along with numerous other retail brokers. It was later revealed that Robinhood had received a significant margin requirement from the DTCC earlier that morning, potentially from an overall net-short position against its customers. In the House of Representatives report on the event, it also revealed that there was discussion between Robinhood its wholesaler Citadel Securities prior to the unprecedented halting of buying shares, but not selling. Not only were wholesalers the only access Robinhood had to lit exchanges, they were also the primary source of income for Robinhood via payment for order flow (PFOF). It is clear that incentives between broker-d ealers wholesalers are not aligned to benefit retail investors. How are retail investors supposed to have confidence in the market? Additionally an issue that is overlooked is that in the pursuit of reduced costs, we overlook whether this system actually improves capital formation for both the investors the issuers. By preventing a significant amount of orders reaching a fair well-regulated exchange that significantly influences the displayed market price there is a distortion of price discovery that may ultimately lead to lower share prices. This may be detrimental to both the investors the companies involved who seek to rely on shares for capital formation and only benefit the wholesalers who operate on volume. That is why I believe this rule is mandatory for a well-functioning market protecting retail investors. This rule seeks to prohibit internalisation until retail orders have had fair access to the market. I believe this will benefit both retail investors institutional investors. For retail investors this will mean we will have greater competition for our orders on the lit exchange potentially improving prices. The increased liquidity provided by retail orders reaching the lit markets will likely also improve accurate price discovery as more quote/trades will be available to determine the price. This will level the playing field between retail orders and institutional orders who already have easy access to the lit exchange leading to more fair efficient markets. Preventing segmentation of orders will increase retail investors confidence in the market protect investors as we will no longer be directly fleeced by wholesalers without choice. As for institutional investors they will no w have greater access to retail orders that may add greater liquidity on a whole stimulate further competition. For specifics, I believe the SECs proposed components of a qualified auction are fair. The aspects described by the SEC such as 100-300microseconds are important to ensure retail orders have sufficient time on the lit exchange, a sufficient price improvement via tick size $0.001, appropriate priorities favouring price improvement over speed preventing qualified auctions from abusing fees. All the proponents are crucial in ensuring that retail orders are fairly exposed to the lit markets. What are some counterarguments to this proposal? - There is sufficient competition already occurs between vendors, not order-by-order? o I believe this is disingenuous as a retail investor as I do not get provided sufficient information to discern between brokers on execution quality, access to vendors or capacity to decline wholesaler access. When I as a retail investor request an order I am not requesting for my order to be fulfilled between a handful of wholesalers, I am expecting my order to reach the lit/well regulated transparent exchange to reach all potential buyers/sellers. This rule provides me access to more competition. o The very fact that of a potential of hundreds of vendors only 2 wholesalers account for 66% of retail orders show that there is not sufficient competition between vendors. - This rule will allow wholesalers to be even more selective with orders they decide to internalise? o The issue arises when wholesalers have the majority of access to orders as they can pick and choose what reaches the lit exchange forcefully skewing price discovery as others do not have visibility of the wholesalers orders. If the orders have already reached the lit exchange, the wholesalers ability to select orders does not impede price discovery as the quotes/trades have already fairly been distributed. - The SEC is micromanaging the market o The role of the SEC is to provide fair, orderly, efficient markets, protect investors aid in capital formation. This rule does all of these things, especially for retail investors who have very much been disenfranchised against large institutions for a long period of time. This is the SECs job. If any rule classifies as micromanaging disqualifies it from being proposed, what is the purpose of having an regulation at all? I believe this is an important rule that fulfills the SECs mandate. - If no one executes the trade on a qualified exchange, what happens to the retail experience? o The aim of the retail experience if to ensure I can form capital. Essential to that is that I have fair access to the market there is appropriate price discovery. If my order is not fulfilled, I will try again at a better priced quote. Speed is not my number one priority would not disincentivise me from participating in the market. Additionally the rule proposes wholesalers are still able to internalise post failure to execute on qualified auction. This would be a great opportunity for wholesalers to display their quoted significant price improvement to retail orders. Otherwise the retail-broker can fulfill their obligation as quoted by their terms conditions. - This is unfair to wholesalers o I would actually suggest the current market system is unfair to retail this rule would not disadvantage wholesalers. Wholesalers are still able to provide their quotes at the best execution quality they supposedly already provide. If they currently provide the best possible execution then it is likely they will continue to do so in a market with greater exposure as they are the currently the most well capitalised most experienced in managing retail orders. They also still have access if the orders fail qualified auction. - Retail already receives significant benefits like commission free trading o I disagree. Commission free trading often means the commission are added in other areas such as spread deposit/withdrawal fees. The significant disadvantage of not having a choice to deny wholesalers to segment our orders from the lit exchange has greater indirect costs than the few dollars we save with commissions. This rule takes great step in reducing this disadvantage. Wholesalers can still provide PFOF with increased disclosure internalisation post exposure to the lit markets for sufficient time. This rule benefits retail investors greater than commission free trading instantaneous market orders. - We should delay this rule until other rules are implemented o I disagree. I believe of all the rules, this rule is most important in protecting retail/individual investors increasing competition. Of all the rules this also impacts the least market participants i.e. the tick size rule fundamentally changes all quotes trades for all market participants all current/future investors. The order execution information rule only adds to disclosures that are already required. For the best execution rule it also applies to all broker-dealers. In contrast this rule only applies to retail/individual orders, with several exceptions to the rule too. I would suggest that if the SEC is looking to delay any rule to gather more data, that they consider delaying the tick size, access fees transparency rule as it has a larger disruptive effect on a larger number of participants. Additionally why are multi-billion dollar, well established institutions incapable of adjusting to only 4 rule proposals with varying degrees of impact, especially when handling bil lions of transactions daily? What changes or improvements can be made to this proposal? - Increase scope of rule to include all retail/individual orders (not just orders $200,000) o I hope the SEC considers including large retail orders $200,000 to the rule when there is sufficient data on execution quality adverse selection cost as I dont believe retail orders on principle should be segmented away from the wider market. - Clarify that orders cannot be postponed to a time when no qualified auction is available o To avoid undue exemptions I believe the SEC should clarify that retail orders cannot be postponed, wilfully or accidentally to avoid active qualified auctions allow wholesalers to internalise without true exposure to lit markets. To discourage this behaviour I believe there should be clear consequences to obfuscating this rule. - Clarify orders retail orders cannot be segmented into fractional shares to qualify for exemption to rule o Similarly I believe it should be explicitly stated that retail orders cannot be segmented into fractional orders unless directly requested by the retail investors. This has been an issue with some brokers such as Robinhood that shows cost price data of multiple fractional purchases when initially requested as whole share orders. - Consider expanding qualified auction required time to 1sec o Although for usual market participants an auction time of 100-300microseconds is large, prolonging this time period will allow retail investors to at least attempt to participate in providing quotes trades. Currently these times are too fast for any human to react only benefit well established institutions, limiting competition. - Consider increasing minimum tick size in qualified auction o As I discuss in the tick size proposal, a sub penny tick size has essentially no real world value to retail investors. Sub-pennies cannot be used for goods or services in the real world so why would this level of price improvement be beneficial to retail investors? Please consider increasing this to at least a penny so that the price improvement can actually be utilised. Final thoughts As a conclusion to this letter I would like to clearly state that I strongly support the SECs rule proposal on Enhance order competition (S7-31-22) truly appreciate the effort, diligence and time spent on this proposal. I believe this an essential rule that should receive full priority in implementation and should not be delayed. All components of this rule are necessary and my only suggestions would be tightening exemptions improving qualified auctions to ensure the spirit of this rule fair access for retail to the market. I hope you take my full comments into consideration consider some of the suggestions I have proposed. I also hope you have an opportunity to read the comments I have also provided on the other 3 rule proposals (S7-29-22, S7-30-22 S7-32-22). Thank you for looking out for retail / individual investors considering our opinions. Kind regards, Aswin Joy Retail / Individual Investor