Mar. 07, 2023
March 7, 2023 Dear SEC / Other market participants, I am a retail / individual investor and I reluctantly support this rule proposal (S7-30-22). Prior to discussing any arguments, counterarguments or suggestions for this specific proposal I would like to emphasize the following with my unique perspective as a retail investor of which many of these rule proposals are addressing: - I DO NOT feel protected as an investor in the current market system - I DO NOT believe I am fairly represented by retail brokerages / market makers or large exchanges when handling my orders or in the public comments provided for these rule proposals - I DO NOT feel I as an individual am provided with sufficient transparency to allow me to instigate my own informed decisions on where best to place my orders or who provides me the best execution - I DO NOT feel I am receiving economically viable price improvement on my orders - I DO NOT feel I am receiving best execution on my orders and feel I am being scalped at the benefit of retail-orientated organisations for their benefit, not mine For the remainder of this letter I have segmented my response into the following: - Why do I agree with this proposal? - What are some counterarguments to this proposal? - What changes or improvements can be made to this proposal? - Final thoughts Why do I agree with this proposal? To my understanding this rule looks to implement three components: - Lower the minimum price increment (tick size) of quotes trades from $0.01 to a variable model with sub-penny increments ($0.001-0.01). - Lowers access fee caps at National securities exchanges requires disclosure of all fee/rebates prior to/at time of order execution. - Increases odd-lot order information by early adoption of definitions including a new best odd-lot pricing category for disclosure I agree to various components of this proposal however reluctantly agree to others. I agree with this rules attempt at accelerating definitions for round lots odd lots, including the new best odd-lot pricing. I especially appreciate that odd lots are now given more importance as incredibly these are the most common representation of individual retail orders. To clarify odd lots are orders less than a round lot typically 100 shares. The odd-lot information should be an essential component of data collection/dissemination as it pertains to most of retails activity in the market. I believe the odd-lot component of this rule should be implemented immediately and is perplexing why such a large portion of the market is not being assessed currently. The best odd-lot pricing category would add greater clarity for retail investors regulators to assess if best execution is applying to retail/odd-lot orders align with SECs aim to improve transparency, improve efficiency protect investors. I also strongly agree all fees rebates should be available prior to or at the time of order execution. This appears to be a common sense rule to ensure that there are no alternative incentives to best execution for clients limit conflicts of interest when rebates are offered post execution. The upfront nature of this component should also reduce ambiguity with best execution as it simplifies the considerations broker-dealers have to make at time of execution. I believe this component of the rule is essential to the aim of this proposal to level the playing field. More clear fixed fees would likely also increase activity at these exchanges by smaller market participants as it reduces the complexity of modelling risks/costs when fulfilling order. The reduction of access fee caps mirror this benefit. In this proposal I admire the attempt by the SEC to equalise the incentives for OTC markets and national securities exchanges/ATS. As stated by the SEC the current Rule 612 has a likely unintended consequence of providing unfair advantage to OTC markets. This occurs as OTC markets do not have to abide by the $0.01 tick size cap while executing trades whereas national securities exchanges/ATS are bound to quotes that are encompassed by Rule 612. As such this incentivises market participants to utilise OTC markets where there is ability to use sub-penny execution less direct regulation oversight. Use of OTC markets are also a core component of retail order mechanics makes regulating/protecting retail investors more difficult for the SEC. By aiming to harmonise the exchanges by removing this unfair advantage this helps investors orders become much more accessible to lit regulated markets where there are a large number of participants competition. As a caveat to this, as a retail inv estor I do believe a similar effect could be achieved by closing the Rule 612 loophole to include trading/executing at a penny cap applying to OTC markets similarly removing undue advantage. My reluctance to this proposal is that reducing to sub-penny tick sizes is not overly beneficial to retail investors. I would argue that a sub-penny improvement on price is not an economically viable improvement. I would not even be able to use a sub-penny to use on other goods/services extending outside the market. This sub-penny range would mean a significantly larger position will be required to have any real life value i.e. at least 10 shares to improve the price by single penny for tick sizes $0.001. It is clear this will only truly benefit the large institutional participants or participants with high volume such as market-makers. Why is efficiency into the sub-penny range necessary? Additionally allowing stocks into the sub-penny range could further the disadvantage real persons have in the current market with large market participants able to leverage microsecond speed orders in addition to comparatively unsurmountable capital. When the human visual reaction speed is 0.25 seconds nearly a million times slower than the microsecond speed high frequency traders (HFT) utilise and the individual value this adds is not even able to be used on goods/services who does this sub-penny tick size benefit? I note this is the SEC rule proposal with the greatest number of market participants affected (all market participants, current future institutional retail investors) likely the largest disruption to current market structure. If any of the rule proposals should be delayed to allow analysis, I believe it should be this rule as it will skew the data the greatest of the 4 rules. What are some counterarguments to this proposal? - Are sub-penny quotes/trades necessary? o Personally I believe the answer is no. On the surface allowing sub-penny prices is consistent with improving market efficiency. However efficiency for efficiencies sake or theory is not always the best approach. For example, I as a retail investor cannot utilise sub-pennies outside of the market for goods/services the very use of money/capital that the SEC is aiming to help form. How does this have any real benefit other than appearing as a theoretical number on my balance sheet? For there to real useable benefit from such pricing I would need a very large order size that only a very select few market participants could truly utilise. This goes against SECs mandate to provide fair markets reduces competition from retail investors. To further the thought experiment, if this is for the purpose of market efficiency why is there a tick size cap at all? Wouldnt it be more efficient to allow smaller increments than even a sub-penny say $0.00000000001? My point being although we could pursue this it would not have any economic benefit for a majority of users in the market. o If the aim of the SEC is to level the playing field why not fix the loophole in Rule 612 instead? Would preventing executing at a sub-penny range across all OTC markets / national securities exchanges / ATS have a similar effect without disenfranchising retail investors and all market participants who are unable to leverage millions of orders? I suspect there will be arguments that fixing the loophole will cause revenue losses for OTC markets however if this was not an intended purpose of Rule 612 then these markets were wrongfully abusing the system, not fairly appropriately following the principle of the rule. - Would a reduced tick size at a fixed rate such as $0.05 provide comparable results? o No, as I believe the purpose of the rule is to equalise the advantages of OTC market participants with ATS/National Securities exchange. Having a fixed rate of $0.05 would counteract the core of this rule as OTC market participants still have an unfair capacity to trade at lower than $0.05 increments. Without an harmonising the tick size between the exchanges this rule has no purpose. - Do quoting trading tick sizes need to be the same? o Yes, as above, I believe the purpose of the rule is to equalise the advantages of OTC market participants with ATS/National Securities exchange. This original issue arises from the discordance of the current Rule 612 that only applies to quotes not trading. Altering this now would be short sighted likely lead to the same issues this rule is proposing to correct. - Does lowering access fees benefit retail investors? o Theoretically providing less access fees to broker-dealers could lead to those savings being passed onto clients. However in practice I do not believe the incentives align for broker-dealers to provide fair cost reduction to their clients. This is especially true without robust best execution that fortunately has been proposed by the SEC. In the absence of best execution or sufficient disincentive against self-beneficiary actions, I believe the access fee reduction is unlikely to cause reasonable cost reduction for end-users. On a macro scale however this may increase usage of national securities exchange increase competition via more participants thus providing better price improvement by proxy. - Should we focus on round lots, not odd-lots the definitions new categories are not required? o I disagree that odd lots should be excluded from the accelerated definition approvals. Odd-lots make up a large portion of retail orders it is clear there is little information on these orders. The lack of data makes odd-lot information even more pertinent than round-lots where there is discernible data available. Not mentioning the increased retail activity gives reason more than ever to assess odd-lot orders that they are using. This is essential in ensuring retail investors are protected furthers transparency. - If only this rule is passed, will this level the playing field? o No, if only this rule is passed of the 4 SEC rule proposals I believe this would further disadvantage retail investors. With only this rule passed, large market participants will now be able to provide minimally beneficial price improvement in sub-pennies versus pennies, reduce their own costs via less fees freeing up more capital to impact the market and trade at speeds faster than humans can react. All of this to improve prices on quotes/trades by sub-pennies that investors cannot use in the real world. If the other rules do not pass, this rule should be delayed indefinitely. The other 3 rules are instrumental in ensuring best execution for retail investors that retails orders cannot be scalped for sub-penny price increments by wholesalers. What changes or improvements can be made to this proposal? - Remove variable tick sizes in sub-pennies rather close loophole in Rule 612 to prevent executing trades at sub-pennies including in OTC markets o I believe this will have the same effect without significantly impacting national securities exchanges/ATS whilst also maintain penny level price improvements that are at least useable in the real world for most participants. o If the loop hole cannot be closed it is critical that the markets are harmonised with identical tick sizes for both quotes/trades if the SEC aims to level the playing field - Consider delaying implementation of rule until outcome of other rules are in place o In absence of a robust best execution (by a non-self-regulating body with several conflicts of interest) rule prevention of retail orders being segmented off lit exchanges then this rule implementation will only further skew the advantages away from retail investors counteractive to the proposal against the fair equitable market protected by the SEC Final thoughts As a conclusion to this letter I would like to clearly state that I do support aspects of the SECs rule proposal on Tick sizes, access fees transparency of better priced orders (S7-30-22) truly appreciate the effort, diligence and time spent on this proposal. I believe this shows a clear determination by the SEC to provide more fair equitable markets. Should the other 3 rule proposals fail to pass I hope the SEC carefully considers the consequences possible benefits this rule may cause. I hope you take my full comments into consideration consider some of the suggestions I have proposed. I also hope you have an opportunity to read the comments I have also provided on the other 3 rule proposals (S7-29-22, S7-31-22 S7-32-22). Thank you for looking out for retail / individual investors considering our opinions. Kind regards, Aswin Joy Retail / Individual Investor