Mar. 31, 2023
March 31, 2023 By Email Vanessa A. Countryman Secretary U.S. Securities and Exchange Commission 100 F Street, N.E. Washington, D.C. 205499–1090 rule-comments@sec.gov Re: Rule Proposal No. 34-96495; File No. S7-31-22 Order Competition Rule “Internalization is one of the greatest threats to price discovery in financial markets.” - Kenneth Griffin Ms. Countryman: Markets function best when there is open, transparent and fair competition for order flow. In all rulemaking efforts, regulators should ask themselves how the rule in question furthers these goals. It is clear beyond a reasonable doubt that our current market structure is anything but open, transparent and fair. The OCR Proposal is one idea. I believe that it represents an improvement over our current market structure, and i fully support it. However, i do not believe that the OCR Proposal is the optimal regulatory response to the problems in our markets. I support open competition for order flow, and also believe that innovation and competition are healthy forces for finding optimal economic outcomes. The ideal place for such competition to occur is at the NBBO. That is where the broadest and most diverse set of participants can come together. If exchanges want to offer qualified auction facilities, they should be permitted to do so, but there should be more room for innovation than what the Commission has advanced in the OCR I believe that there is a direct relationship between high internalization rates and increased execution costs to institutional investors. Babelfish found that “impact costs for stocks with a high retail market share were three times as expensive as stocks with low retail involvement. We also found that as retail market share increases, costs increase.” This further demonstrates that markets are becoming increasingly fragile. And as more trading volume is siphoned out of the lit system, and into the uncompetitive off-exchange realm, market efficiency is suffering, liquidity is dropping, and transaction costs are increasing. As Citadel CEO Ken Griffin explained presciently in 2004 when he foresaw all of these problems: “As more and more brokers engage in the practice of internalization, bid-ask spreads in the public markets will continue to be wider than they otherwise would, quoted liquidity will continue to fall and the role and value of the public markets will be greatly diminished. Furthermore, as bid-ask spreads widen in response to internalization, aggressive broker-dealers will be able to internalize an ever increasing portion of their order flow, sending only the most challenging of orders into the marketplace for execution - and only further worsening the situation corroding the value of the market.” I wholeheartedly agree that these practices have corroded the value of public markets, and that the investing public is paying the price. The SEC must make the necessary changes to protect retailer investors who are more often than not the ones disadvantaged by high rates of internalization. Additionally increased toxicity of order flow going to lit stock exchanges reduce incentives for on-exchange market makers to post limit orders. Other exchange-based incentives reward speed and induce a latency race-to-zero. This combination leads many market makers to exit lit markets, reducing market maker diversity and increasing market fragility. There is absolutely no reason to think that open competition for retail order flow will not result in the same, or better, outcomes for individual investors. In fact, it is possible that auction participation could be even more aggressive for institutional investors than for high-speed intermediaries. I support the Commission’s efforts thus far although I believe that an end to internalisation with on-exchange competition, will result in better outcomes for retail investors and the market as a whole. Sincerely, Darren Munday