Mar. 28, 2023
March 28, 2023 To Whom It May Concern, I am strongly opposed to the proposed Order Competition Rule, File No. S7-31-22, Release No. 34-96495, which, in my opinion, will hurt retail investors like me while benefiting Nasdaq, Calpers, and brokers who can support zero-commission trading with other revenue. Last fall, the SEC released a report on the 2021 rally in "meme" shares, which found no evidence of market manipulation or systemic risks associated with it [1]. Despite these findings, the agency continues to argue that the practice known as payment for order flow (PFOF) presents a business conflict that harms retail investors. However, the new rules presented by the SEC do not provide convincing evidence to support this view. Christopher Schwarz of the University of California at Irvine, Brad Barber of the University of California, Davis, and Terence Odean of the University of California, Berkeley published research in August 2022 that argued that PFOF does not appear to affect price execution in a detrimental way for retail customers [2]. "Wholesalers" can execute trades from zero-commission brokers at better prices than are available on stock exchanges because they are not competing with large institutional investors. PFOF, in turn, benefits retail investors since they do not pay commissions and can often get better prices. However, stock exchanges are unhappy because they do not have access to retail trading, which means less revenue. Institutional investors such as pension funds that trade mostly on exchanges complain that they get worse prices when there are fewer counterparties. In a public comment, SEC Chair Mr. Gensler stated that he dislikes trading off exchanges because he believes such trading is visible to regulators: "The markets have become increasingly hidden from view, especially for individual investors" [3]. The SEC concedes that PFOF offers better prices for retail investors. Furthermore, the SEC claims that prices could be even better if markets were reformed as outlined in the Order Competition Rule. The new SEC rule seeks to replace PFOF with auctions that have various market participants competing to execute their marketable orders at the best possible price. These auctions would be separate from the exchanges but could be operated by them. Brokers would send their retail orders into auctions, where they would be accessible to institutional investors and others. The SEC claims that this process could potentially lead to better prices for retail investors. However, there is no evidence produced to unequivocally demonstrate that this will indeed be the case. Whether there will truly be price improvement for retail investors is doubtful. With auctions in place, brokers might have to return to charging commissions or other trading fees to replace payments from wholesalers. Notably, in Canada, PFOF is not allowed on Canadian listed securities, so Canadian brokers charge commissions [4]. In my opinion, the true beneficiaries of the proposed new rules will not be retail traders but Nasdaq, Calpers, institutional investors, and large incumbent brokers who can support zero-commission trading with other revenue. Sincerely, Alexander Meves, MD, MBA References: 1. https://www.sec.gov/files/staff-report-equity-options-market-struction-conditions-early-2021.pdf 2. Schwarz, Christopher and Barber, Brad M. and Huang, Xing and Jorion, Philippe and Odean, Terrance, The 'Actual Retail Price' of Equity Trades (September 14, 2022). Available at SSRN: https://ssrn.com/abstract=4189239 or http://dx.doi.org/10.2139/ssrn.4189239 3. https://www.sec.gov/news/statement/gensler-order-competition-20221214 4. https://www.reuters.com/article/us-retail-trading-canada/canada-stock-market-rules-curb-platforms-linked-to-churning-u-s-stocks-idUSKBN2A92NC