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Enhancing Equity Market Competition

Oct. 15, 2021

[1]Thank you, Rich [Repetto] for that kind introduction.  Before I begin, let me give my standard disclaimer that the views I express today are my own and do not represent those of the Commission or my fellow Commissioners.

It’s great to be with you to discuss equity market structure, an area I am particularly passionate about.  The U.S. equity market serves a vital function for both issuers and investors.  A vibrant equity market can reduce the cost of capital for companies and help investors grow their savings to provide for their families and save for retirement.  Retail investors can do this directly through broker-dealers or indirectly through pooled vehicles such as mutual funds.  The challenge for the Commission in continually seeking to optimize equity market structure is to strive for outcomes that further the important interests of two constituencies: investors, namely retail investors and institutional investors that are effectively pooled retail, and issuers.

Over the last few years, we have seen an increase in the number of retail investors participating directly in our equity market.  This a welcome development.  However, this increased retail participation has also led to much discussion about certain market structure topics related to off-exchange trading.  Today, I would like to share my views with you on some of these important issues including payment for order flow, best execution, execution quality measurements, and the effect of off-exchange trading on public price discovery. 

Importantly, I also plan to highlight several actions the Commission has taken over the last three years to enhance competition in ways that bear directly on these matters.  I am glad to have had the opportunity to contribute to these initiatives.  It is through the continued promotion of competition that the Commission is best able to pursue equity market structure policy that furthers the interests of issuers and investors of all types.

Payment for Order Flow

Let’s start with payment for order flow.  In the wake of the meme stock volatility this past January, we started hearing renewed calls for the Commission to address payment for order flow.  I must admit I am a bit perplexed at this since I have not seen any evidence of a connection between the meme stock episode and payment for order flow.  The amount of vitriol against payment for order flow reminds me of the old Washington adage: never let a crisis go to waste.  In any event, critics suggest that the SEC must regulate payment for order flow to deal with the conflict of interest it poses. 

However, the fact is we already regulate payment for order flow.  Our regulatory approach features two key aspects specifically designed to address the potential conflict of interest.  The first is best execution.  The Commission has long stated that a broker-dealer must not let payment for order flow interfere with its efforts to obtain best execution.[2]  In other words, brokers must make sure their customers are getting the most favorable terms reasonably available notwithstanding the receipt of payment for order flow.[3]  This alone is an important tool in mitigating any potential conflict associated with payment for order flow.

Second, we have a comprehensive disclosure regime under Rule 606 of Reg NMS.  The Commission updated this rule just three years ago in order to increase the information broker-dealers publicly disclose about payment for order flow.[4]  Amended Rule 606 requires brokers to disclose both the amount of payment for order flow received from certain venues as well as a description of any term of a payment for order flow arrangement that may influence a routing decision.[5]  We have provided a lot of guidance on what should be disclosed on 606 reports (people should look at footnote 397 of the release).[6]  Suffice it to say, “any term” means any term.  Rule 606, as amended, reflects the Commission’s historical preference for utilizing public disclosure as a key tool in addressing potential conflicts.[7]  I believe this is an important and, unfortunately, overlooked requirement in the current discussion on payment for order flow.

While I do not mean to suggest that a discussion of payment for order flow is unwarranted, I am concerned both with linking that discussion to the events of this past January and also not considering the broader context of the Commission’s existing regulatory approach.

Promoting Execution Quality

This is not to say that there is not more the Commission can do to enhance competition as a means to facilitate best execution.  I have previously stated that the Commission should consider enhancing the monthly execution quality reports issued by market centers pursuant to Rule 605.[8]  These reports are supposed to assist brokers in fulfilling their best execution obligations by providing standardized assessments of execution quality.[9]  Rule 605 reports also promote competition among market centers on the basis of execution quality which can in turn lead to more efficient transactions for investors.[10]  However, Rule 605 has not been updated in twenty years, during which time the equity market has undergone tremendous evolution.  As a general matter, it is critical that we routinely review existing rules to keep pace with both changes in the market and changes of our own doing.

Potential enhancements to 605 reports could include refining certain data elements as well as adding new elements and metrics, including those that may be most relevant for institutional investors.  For example, more granular execution speed buckets may be appropriate in an era of sub-second execution.  Similarly, changes to the order size buckets would seem to be appropriate.  Consider that current Rule 605 reports do not even capture certain round lots under the Commission’s new definition of a round lot for stocks over $250.[11]  These and other new metrics all seem to be worthy of consideration and work. 

In this regard, I have also stated that it may be worth developing a separate execution quality report to be issued monthly by retail brokers.[12]  One means by which we could foster competition for the execution of marketable retail orders is by facilitating robust competition among retail brokers on the basis of execution quality.  However, there is currently no standardized approach by which retail brokers can compete on an apples-to-apples basis.

The original premise behind Rule 605 was that it would work hand-in-hand with Rule 606 so that a customer would be able to see both the venues to which its broker sent orders and the level of execution quality the customer could generally expect to receive from those venues.[13]  While I think this logic holds, it would also benefit customers to see the execution quality their broker actually received at each venue identified on its Rule 606 reports.  This could go a long way to further promote competition for retail orders.

Operational Transparency

We should also consider the state of competition among different types of markets and assess the extent to which there is a level playing field.  A strength of our equity market is vigorous competition between different types of market centers.  Each day sixteen national securities exchanges, over thirty alternative trading systems (“ATSs”), and many more broker-dealers compete to execute investor orders.[14]  Competition among markets is important because a dominant market could utilize its market position to exert pricing pressure on investors.  I believe our regulatory framework has been successful in promoting competition to prevent such an occurrence.

Nevertheless, we should continually assess whether regulating different types of market centers in a disparate manner makes sense in light of current market conditions.  For example, exchanges and ATSs are required to provide public disclosures of their operations through either rulebooks, for exchanges, or Form ATS-N for ATSs.[15]  However, off-exchange market makers do not have an obligation to provide transparency into their operations.  While many such firms provide voluntary disclosures on their websites, I believe it would promote competition among markets to require certain off-exchange market makers to provide public transparency in a uniform manner on their operations.  I have personally heard from market participants that they have benefited from the disclosures on Form ATS-N.  I believe similar disclosures for off-exchange market makers would likewise be beneficial.

Public Price Discovery

The last area I’d like to highlight is the effect of off-exchange trading on public price discovery, which is a decades-old question that has recently been receiving renewed attention.  But it is absolutely a very important question as it goes to one of the key functions of a market. 

I believe that any honest conversation on this topic must begin by acknowledging the important steps the Commission unanimously took less than one year ago to narrow quoted spreads and require the display of better priced odd-lot quotations.[16]  These reforms are designed to greatly improve the public price discovery process and are worth spending some time on. 

The Commission chose to define the amount of shares necessary to constitute a round lot based on a stock’s share price.[17]  In other words, as a stock’s price increases, the number of shares necessary to constitute a round lot decreases.  This is important because under our rules, a bid or offer must be for at least a round lot in order to constitute a market’s best quote and thereby receive price protection and potentially comprise the NBBO.[18]  The Commission decreased the notional amount required to set the best displayed price as means to, among things, narrow spreads, particularly in high priced stocks, which not only facilitates better price discovery, but lowers transaction costs for all investors, and fosters competition by better encouraging the display of limit orders.[19] 

The adopted round lot tiers were based on a robust data analysis that sought to strike a balance between capturing a substantial portion of better priced odd-lots while ensuring, as the Commission stated, that “additional orders of meaningful size [are able] to determine the NBBO,” so that “execution quality and price improvement statistics required under Rule 605 would be based upon an NBBO that the Commission believes is a more meaningful benchmark for these statistics.”[20]  The tiers were designed to reflect current average trade sizes because the Commission believed that average trade size is a reasonable proxy for a meaningfully sized order, which is what a round lot, and therefore the NBBO, is supposed to represent.[21]

The Commission did not stop there.  We also required, for the first time, that odd-lot quotes priced better than the best bid or offer be displayed with market attribution in consolidated market data.[22]  The Commission recognized that particularly for high priced stocks, odd-lots can represent meaningful liquidity at improved prices for retail investors.[23]  Including these quotes in consolidated market data, along with the changes to round lots, is designed to further public price discovery and facilitate best execution.[24] 

While these amendments go a long way to enhancing equity market structure, I do believe there are further steps the Commission can take to help improve public price discovery.  First, it would be worthwhile to assess whether we should revise the current tick size regime, particularly for stocks that the data suggests may be tick-constrained.  Artificially wide spreads that are a function of the tick size regime do not serve public price discovery or facilitate fair competition between exchange and non-exchange markets.  Reducing the tick-size for at least some stocks may also lower execution costs to the benefit of all investors. 

Second, I believe we should consider identifying non-exchange market centers in trade reports published on the consolidated tape.  Currently, when an execution occurs at an exchange, the exchange is identified in the public trade report.[25]  However, when an execution occurs off-exchange, while the symbol, size and price is displayed to the public, the off-exchange market center is not identified.[26] 

The reporting and public display of every trade is important to further the price discovery process.  Consolidated market data is a key tool through which we facilitate price discovery and address market fragmentation.  Identifying off-exchange market centers in trade prints may help alert investors to the market that may have available liquidity at a favorable price and also whether they would even be able to access such liquidity. 

More Pressing Needs

I would be remiss if I didn’t mention another item which I think requires regulatory attention and priority.  We have been very fortunate that for the most part, when broker-dealers have been forced to shut down and unwind operations, customer accounts have been able to be transferred to other broker-dealers in a relatively timely manner.  This does not mean that the current system is one which could not pose issues.  I believe we need to focus on standardizing the ways accounts are formatted and processed at broker-dealers so that if there needs to be a liquidation or bulk transfer of customer accounts, another broker-dealer’s system could promptly receive these accounts.  If we do not address this issue, I think problems could arise.

Focus on the Pragmatic

In thinking through the ideas I have shared with you today I have sought to focus on pragmatic solutions.  Regulatory enhancements to our national market system are only as good as their ability to work in practice.  The Commission best serves investors and issuers when it focuses on competition enhancing initiatives that limit the potential for unintended consequences that may not even spare a rule’s intended beneficiaries.

Moreover, it has been disappointing that a number of important market structure initiatives over the last few years have been the subject of litigation.  I believe it is important for the Commission to learn from these experiences and focus our efforts on ideas that generate greater consensus.  Given the complexity of these issues any potential alteration to market structure rules will be the subject of reasonable disagreement.  But rules tied up in litigation ultimately serve no one.  I believe the ideas discussed today would be the subject of broad consensus and would provide meaningful benefits to equity market participants.  For those that want to discuss these or other topics with me further please reach out, my door is always open.


[1] Based on comments provided in a fire-side chat with Rich Repetto, Piper Sandler & Co. on October 15, 2021.

[2] See Payment for Order Flow, Final Rules, Securities Exchange Act Release No. 34902 (Oct. 27, 1994), 59 FR 55006, 55009 (Nov. 2, 1994) (“Payment for Order Flow Adopting Release”) (“Broker-dealers accepting remuneration from a market center for directing order flow to that market center are still obligated to fulfill their duty of best execution to their customers.”). 

[3] See Order Execution Obligations, Final Rules, Securities Exchange Act Release No. 37619A (Sept. 6, 1996), 61 FR 48290, 48322 (Sept. 12, 1996) (explaining that the “duty of best execution requires a broker-dealer to seek the most favorable terms reasonably available under the circumstances for a customer’s transaction.“).

[4] See Disclosure of Order Handling Information, Securities Exchange Act Release No. 84528 (Nov. 2, 2018), 83 FR 58338, 58374-76 (Nov. 19, 2018) (“Disclosure of Order Handling Information Adopting Release”).

[5] 17 CFR 242.606(a)(iii) (requiring disclosure for each identified venue of the net aggregate amount of any payment for order flow received, payment from any profit-sharing relationship received, transaction fees paid, and transaction rebates received, both as a total dollar amount and per share, for four types of non-directed orders) & 17 CFR 242.606(a)(iv) (requiring for each identified venue a description of any arrangement for payment for order flow and any profit-sharing relationship and a description of any terms of such arrangements, written or oral, that may influence a broker's or dealer's order routing decision).

[6] See Disclosure of Order Handling Information Adopting Release, 83 FR at 58374-76 & n. 397 (discussing the types of information to be disclosed on 606 reports); Division of Trading Markets, Responses to Frequently Asked Questions Concerning Rule 606 of Regulation NMS, Issue 14: Arrangements Affecting Execution Quality at a Venue available at (“The Commission stated in the Adopting Release that, ‘because such arrangements would influence a broker-dealer’s order routing decision, the amended rule requires disclosure of the details of any arrangement between a broker-dealer and a Specified Venue where the level of execution quality is negotiated for an increase or decrease in payment for order flow.’ In the view of staff, the details of any arrangement could include the amount of price improvement (i.e., the level of execution quality), the amount of payment for order flow that is negotiated, and the details of any arrangement where the execution quality or payment for order flow provided by the venue varies based on the characteristics or categories of the order flow that the broker-dealer routes to the venue. For example, such details could include different terms for different categories of securities, if applicable, including categories such as high-priced securities, highly active securities, ETFs, indexed securities (such as securities included in the S&P 500), as well as different terms for different order sizes, if applicable.”).

[7] See Payment for Order Flow Release, 59 FR at 55006 (“The Commission believes this approach will further the investor protection goals of the [Exchange] Act, and is consistent with the general philosophy underlying disclosure that ‘sunlight is the best disinfectant.’”);  see also Disclosure of Order Handling Information Adopting Release, 83 FR at 58341. 

[8] See Elad L. Roisman, Statement for Investor Advisory Committee Meeting (June 10, 2021), available at | Statement for Investor Advisory Committee Meeting.

[9] See Disclosure of Order Execution and Routing Practices, Securities Exchange Act Release No. 43590 (Nov. 17, 2000), 65 FR 75414, 75417 (Dec. 1, 2000) (stating that Rule 605 “will require market centers to prepare and make available to the public monthly reports in electronic form that categorize their order executions and include statistical measures of execution quality.”).

[10] See id. at 75434.

[11] 17 CFR 242.600(b)(13) (Categorized by order size  means dividing orders into separate categories for sizes from 100 to 499 shares, from 500 to 1999 shares, from 2000 to 4999 shares, and 5000 or greater shares.); 17 CFR 242.605(a)(1) (requiring monthly 605 reports to be categorized by order size); 17 CFR 242.600(b)(82)(ii)-(iv) (defining round lots for stocks priced between $250.01-$1,000 as 40 shares, priced between $1,000.01-$10,000 as 10 shares, and priced at $10,000.01 or more as 1 share).

[12] See Elad L. Roisman, Statement for Investor Advisory Committee Meeting (June 10, 2021), available at | Statement for Investor Advisory Committee Meeting.

[13] See Disclosure of Order Execution and Routing Practices Adopting Release, 65 FR at 75414-15 (“To complement the improved public disclosure of execution quality by market centers, the Commission also is adopting a rule to improve the disclosure of order routing by broker-dealers.”).

[14] For a list of registered national securities exchanges see; for a list of ATSs that trade NMS stocks see

[15] 17 CFR 240.19b-4(m)(1) (Each self-regulatory organization shall post and maintain a current and complete version of its rules on its Web site.); 17 CFR 242.304(b)(2) (stating that the Commission will make public on its website each effective initial Form ATS-N, as amended and each Form ATS-N amendment to an effective Form ATS-N, among other things).

[16] See Market Data Infrastructure, Securities Exchange Act Release No. 90610 (Dec. 9, 2020), 86 FR 18596 (Apr. 9, 2021) (“Infrastructure Adopting Release”).

[17] 17 CFR 242.600(b)(82) (establishing four round lot tiers and defining a round lot based on an NMS stock’s average closing price on a national securities exchange from the prior month).

[18] 17 CFR 242.600(b)(11) (defining bid or offer as a price communicated by any member of an SRO to a broker, dealer, or customer, at which it is willing to buy or sell one or more round lots of an NMS security); 17 CFR 242.600(b)(10) (defining best bid and best offer as the highest priced bid and lowest priced offer); 17 CFR 242.600(b)(50) (defining national best bid and national best offer as the best bid and best offer that is calculated and disseminated); 17 CFR 242.600(b)(70) (defining protected bid or protected offer).

[19] See Infrastructure Adopting Release, 86 FR at 18611-20.

[20] See id. at 18621.

[21] See id. at 18618 (“staff evaluated all trades that occurred in 2019 and observed that the average number of shares for all trades was about 193 shares, with an average trade size of $8,842 (excluding auctions, the average number of shares per trade was 178 shares, with an average trade size of $8,068). As a round lot is a trading unit that reflects an order of meaningful size to market participants, and since average trade or order sizes are a reasonable proxy for what market participants consider to be a meaningfully sized order, the Commission believes it is appropriate to adjust the notional value threshold of the new tiers upward to $10,000”).

[22] 17 CFR 242.600(b)(21) (including odd-lot information and the attribution of the national securities exchange or national securities association that is the source of that information in core data); 17 CFR 242.600(b)(59) (defining odd-lot information).

[23] See Infrastructure Adopting Release, 86 FR at 18601 (“as a result of the new round lot definition and the inclusion of odd-lot quotations in core data, retail investors will be able to see, and more readily access, better-priced quotations.”).

[24] See id. at 18613 (“Making the best priced quotations available in core data is consistent with the Commission’s goals in expanding the content of NMS information: Enhancing the availability and usefulness of the information, reducing information asymmetries, and facilitating best execution.”).

[25] See CTA Plan Section I.(m) (defining last sale price information as including the identifier of the Participant furnishing the prices) & VI.(f) (stating that last sales prices sent from an exchange include the alphanumeric symbol of the market of execution), available at,%202021.pdf; Nasdaq UTP Plan Section VI.C.3 (stating that the Processor will disseminate transaction reports that shall be designated with a symbol identifying the Participant in whose Market the transaction took place) available at

[26] See CTA Plan Section I.(m) (defining last sale price information as including the identifier of the Participant furnishing the prices) & VI.(f) (stating that last sale prices collected by FINRA and reported to the Processor shall include the alphanumeric symbol that distinguishes those last sale prices from those reported by an exchange); Nasdaq UTP Plan Section VIII.C (identifying ‘D’ as the symbol for all transaction reports where FINRA is the identified Participant in whose market the transaction took place).

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