Mar. 15, 2023
Dear SEC: The SEC has real teeth but chooses not to use them. Please include a Three-Strikes and You’re Out and start to remove the ability for brokers and market makers to participate in the market if they do not abide by the rules. They may claim that the rules and internal governance against those rules is too complex. I view this as nonsense in a world of fully automated ERP systems with checks and balances that cannot be bypassed without intentional authorization. But if you must - allow an appeal process for brokers (who remain banned) and the burden of proof is upon them that the failure to adhere to the rules and laws were accidental and not purposeful by any level of employee. There is a crisis of governance and enforcement needs to be beefed up. Small fines (cost of doing business) should be abandoned in favor of market participation bans. The wholesaler model is fundamentally problematic and based on flawed thinking. If price discovery is a true market objective then the wholesaler model works against it. It establishes the ability of a wholesaler to skim fractions of pennies from customers. Wholesalers have been charged hundreds of times so we know the basic model does not give true price transactions to household investors and must be ended. The liquidity argument is fallacious and must be discounted. Let me repeat it. It must be discounted. There are other ways of building liquidity. Pauses, minimum trade request volume balancing, informed trading through volatility metric presentation. Liquidity as practiced by market makers simply suppresses price signals. These other approaches (think of a slow pass filter) will simply smooth out the real signal and let people see it. For proof that non-household traders need high frequency advantages one merely needs to look at the tens of billions of dollars spent on high frequency infrastructure. When a market maker suppresses price signals they can either internalize orders for another day or procure derivatives against those real price signals. A market maker that has an investment arm is the most transparent conflict of interest in the market place today. Liquidity will appear if you slow everything down. You can go much, much slower than proposed in the current rules. There is an argument people make that lower cost commissions and Payment For Order Flow (invented by none other than financial criminal Bernie Madoff) enable more people to participate in the markets. A number of studies have proven that order execution is inferior with PFOF than simply going directly to the market. Further, as a household investor it’s almost impossible to tell whether your order was routed directly to the market or was somehow sidelined into the PFOF skim-machine. PFOF feeds the high frequency trades that market-makers can sideline. As a household investor I need clear options on how to route my trade. I want it going to the market. I want it in a fair auction. I prefer auctions to be bucketed so I get a fair price. The quote and trade must happen in the same time increments. All trade increments must be harmonized. Put them all in a bucket and then let the bids that match the offers get closed. I am willing to pay for the trade. Unfortunately market makers can suppress my price signal. This must stop. There are too many mushy-words in the current proposal. Words like ‘reasonable amount of liquidity’ create opportunities for avoiding the rules. Clear rules on tick sizes and timing are required. Clear. Unambiguous. No ability to deviate. If you can’t explain it to a ten year old the rule is too complex. Your rules support the inclusion of odd lot information. I fully support this. Ensure that ALL odd lot information is included. Household investors will almost certainly buy fewer shares than large investors. That means they will be participating in the odd lots count. That means their pricing signal information will be included. This can only help with market efficiency. The NBBO must NOT be excluded from the odd lots reporting. Finally, failures to deliver (FTDs) are a cancer on the market. Much of the discussion of market transaction fairness is moot without addressing Failures-To-Deliver. Without any new regulations the SEC can start banning serial FTD brokers. Start small to send the message. Force some brokers out of the market. A pattern of recidivism is clear in the few SEC enforcements completed to date. Those market participants are BAD ACTORS and damage faith in the market. The trade rules and FTD issues should be integrated. Right now the DTC knows how many shares are in circulation for every ticker. They obviously know the total that should be in circulation. As shares swirl around during closing a small percentage which can cause temporary FTDs. At a certain point (say DTC reports 3% more shares in circulation than issued) then sellers should be required to prove they own the shares before they are allowed to enter into the auction. Broker A has 1000 shares reported in their name at the databases at the DTCC. The broker’s customer has 2000 shares in Broker A account. Customer goes to sell their 2000 shares. Broker A sells 1000 shares and reports 1000 share FTD to customer and to SEC. It’s time for the DTCC to be live and in-the-loop on all trades to eliminate false supply/demand signals. Thank-you for allowing me the opportunity to provide my input. Daryll Fogal.