Mar. 19, 2023
Dear Sir or Madam, although I am a non US-based household investor, due to the global economic status of the US and its financial and monetary policies and market regulations I am still impacted by US market regulations and therefore want to make my voice on how these markets should be structured heard. As English is not my first language, please forgive me minor spelling mistakes and wordings that might sound strange to a native speaker. First let me start by stating that every law, policy or rule is only useful if enforced in an way that acts as a real deterrent. Fines, as too often handed out in the past to rule-breakers, should be much more than a mere slap on the wrist, the should come in such a way, that all profits stemming from the breaking of the rule are skimmed off per se with a significant fine on top of that. Financial brokers, broker dealers or whomever should fear possibly losing their license, just as a drunk driver would for violating traffic rules and laws. That being said - I fully support Order Competition Rule, File No. S7-31-22, Release No.34-96495 and commend you to implement it as soon as possible. "It is in the public interest and appropriate for the protection of investors and the maintenance of fair and orderly markets to assure [...] fair competition among brokers and dealers, among exchange markets, and between exchange markets and markets other than exchange markets" (15 U.S.C. 78k-1 (“section 11A”)). For too long the Commission has not be enduring fair competition, especially within the off-exchange systems that currently dominate larke parts of exchange markets. It's good to see the Commission is beginning to take their mandate more seriously. Monopolies are inherently bad, and there is clear monopolistic behavior in the current market mechanisms. The Commission notes that 90% of marketable orders of individual investors in NMS stocks to a small group of six off-exchange dealers, and 66% is captured by just two firms. Those figures surely are even higher for specific stocks. The state of American markets is clearly anti-competitive, therefore inherently not “free” and that needs to change. The current market is obviously not fair and this proposed rule is an important step in mending that. Fair competition is incredibly important and it’s good to see the SEC prioritizing true competition. There are clearly some market participants who will comment on this rule as they are currently benefitting from a dominant, anti-competitive position in the marketplace. They pay for order flow or secure order flow through backroom deals, which prohibits real price discovery on lit and open markets and therefore lead to an intransparent and unfair market. All orders for any market should be executed or traded in lit markets - it's good and deeply appreciated to see that the Commission finally realizes this. Fragmentation of the markets makes things overcomplicated in a way that only benefits large, dominant players. I prefer a more simple, transparent, and free market structure like the one proposed in this rule. I would gladly pay more per transaction to avoid being routed through a wholesaler that has been charged over 70 times by the United States government (https://files.brokercheck.finra.org/firm/firm_116797.pdf). I would gladly pay commission to avoid being routed through a wholesaler, especially one with a long record of flouting the law like Citadel Securities. The parties involved have very clear conflicts of interest. Citadel is a large source of funding for many broker-dealers and is, for example, the NYSE's biggest customer. Wholesalers exercise extreme influence on other market participants and I am concerned that influence will infect the ability of some participants to objectively review these rules. Research heavily suggests that internalization is bad for markets: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4070056 Wholesalers are lying about the quality of their services to maintain their profits. For example, Commission analysis of CAT data in infra Table 20 found that, on average, 51% of the shares of individual investor marketable orders internalized by wholesalers are executed at prices less favorable than the NBBO midpoint. Out of these individual investors shares that were executed at prices less favorable than the midpoint, on average, 75% of these shares could have hypothetically executed at a better price against the non-displayed liquidity resting at the NBBO midpoint on exchanges and NMS Stock ATSs. I dislike middlemen that simply exist to get their cut of a transaction that would otherwise occur without said middlemen. It is clear to me that removing the profiteering middlemen from the market will improve prices for both individuals and institutions (e.g. pension funds). Recent research by Hittal Mittesh suggests that on top of the Commission's estimate that the auctions would save individuals from billions of dollars taken by wholesalers, it would also save institutions over $1.5 billion each year (https://4982966.fs1.hubspotusercontent-na1.net/hubfs/4982966/BestEx%20Research%20Order%20Competition%20Rule%20Analysis%2020230105.pdf I deeply appreciate and support any efforts to reduce the speed games that damage the integrity, credibility, and functioning of American markets. I deeply appreciate and support any efforts to reduce inducements and to reduce the ‘farming’ of individuals’ orders for rebate money. A broker routing orders first to a wholesaler, who then passes them to the auction, which might route it back to the wholesaler, seems unnecessarily complex and also grants the wholesaler a profound information advantage against other market participants: they get to see orders well before anyone else. The Commission should address this unfair information advantage by having brokers first route to the auction and specify where the order should go if the auction is unsuccessful. That way the entire market has equal knowledge. The current rule forces dark pools (Alternative Trading Systems) to provide quotes and trades to consolidated market data IF they wish to operate as an auction. I fully support and appreciate rule changes like this that bring more transparency to dark markets. The investing public should have easy access to what is happening within the markets. Please be aware that I used so pre-formulated snippets I writing this comment. Although not fully formulated by myself, this e-mail states my mind and opinion nonetheless. Respectfully, Thomas Ellmer