Mar. 19, 2023
Order Competition Rule S7-31-22 Investors should have access to the best priced quotations available in the national market system and such prices generally should be determined by competitive market forces. Broker-dealers route more than 90% of marketable orders of individual investors in NMS stocks to a small group of six off-exchange dealers, often referred to as “wholesalers”. The wholesaling business is highly concentrated, with two firms capturing approximately 66% of the executed share volume of wholesalers as of Q1 2022. Citadel recommended withdrawing this proposal for a number of reasons, including the unprecedented nature of requiring certain market participants to utilize a specific trading protocol. Sending my orders to a wholesaler to be internalized is a specific trading protocol that I’d rather pay commission to be able to avoid. Citadel has been front-running customer orders since 2006 (https://files.brokercheck.finra.org/firm/firm_116797.pdf) and shouldn’t be allowed to have a monopoly on retail order flow. The proposal allows for orders to go to Internalizers FIRST and then to the auction for fair competition. This still gives them a major information advantage which should be removed. Brokers should be routing directly the auction, and Internalizers should be able to trade with our orders competitively. The proposal states that customers who make over 40 trades/day will not be subject to this rule but I think they should be covered under this rule as well. Allowing as many orders as possible is beneficial for competition. My only concern is that brokers will start charging outrageous commissions or fees in lieu of PFOF, so I’d recommend a cap on the amount of commissions or fees that the brokers are allowed to charge. The current market is obviously not fair and this proposed rule is an important step in that direction. Fair competition is incredibly important and it’s good to see the SEC prioritizing true competition. Monopolistic wholesaler dominance of order flow has damaged my faith in American markets, and I would love to see these rules put into effect (and appropriately enforced). Disclosure of Order Information S7-29-22 The Commission is proposing changes to rule 605 of Regulation NMS to include more information about broker executions. Currently, brokers have to file 606 reports quarterly. In Dec 2022: FINRA, along with the SEC, sent out risk alerts 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. 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. While I do support the idea and definitely agree with the need to be more transparent, one would expect brokers to 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. Again, these rules would have to be appropriately enforced. As compliance to date has been embarrassingly low, the Commission should make it a priority to increase fines and penalties for violations. The lack of compliance with 606 reports communicates a tendency for funds and firms to send out bad data to obscure their own situation. Companies that sell market data are then damaged, as faith in the markets overall are damaged. Why pay for data if it’s full of lies?