Mar. 19, 2023
March 19, 2023
The state of American markets is currently anti-competitive, and fair competition is essential to ensure that both individuals and institutions, such as pension funds, receive the best prices. Therefore, it is important to address several issues that affect market transparency and fair competition.
One issue is the current rule that allows Citadel to be the first to receive orders, which unfairly gives them an advantage. To promote fair competition, the proposed rule states that orders must go to a public auction where everyone, including pension funds, has an equal opportunity to fill the order.
Another issue is the practice of Payment for Order Flow (PFOF), which has been effectively banned in the UK due to conflict-of-interest concerns. Brokers who do not accept any kind of PFOF route orders differently and consequently see superior execution quality. A recent study found that Robinhood does not provide statistically significant price improvement relative to exchanges, despite PFOF being responsible for around 70% of its revenue. Furthermore, retail investors not dealing with PFOF get a better price than those dealing with it, violating FINRA's Best Execution guidance.
The Financial Industry Regulatory Authority (FINRA) is currently evaluating the impact of not charging commissions on member firms' order-routing practices and decisions, and the findings should be made public. Additionally, TD Ameritrade's order routing decisions don't seem to be motivated by competition despite what they state on their website, and they pay to get the first look at orders, routing them to firms that net themselves billions of dollars in the process.
Another issue that affects market transparency is the lack of transparency in Dark pools (Alternative Trading Systems). Dark pools should provide quotes and trades to consolidated market data to bring more transparency to dark markets. Moreover, wholesalers exercise extreme influence on other market participants, and there are conflicts of interest that may infect the ability of some participants to objectively review the rules. Wholesalers are taking billions from individuals and institutions and calling it \"superior performance\" while lying about the quality of their services to maintain their profits.
To address these issues, the Commission should ensure fair competition by reducing monopolistic behavior and removing profiteering middlemen from the market. The proposed rule to bring more transparency to dark markets should be implemented as soon as possible, and the SEC should investigate conflicts of interest among market participants to ensure that participants can objectively review the rules. Furthermore, enforcement of SEC rules needs to be improved with higher fines to serve as a significant deterrent for breaking the law. Finally, some broker-dealers should lose their licenses instead of receiving fines that amount to a cost of doing business.
Removing middlemen from the market will improve prices for both individuals and institutions, such as pension funds. The auctions would save individuals billions of dollars taken by wholesalers. Therefore, it is imperative that the Commission takes the necessary steps to ensure fair competition, especially within the off-exchange systems that currently dominate.