Mar. 31, 2023
In recent years, the US markets have seen a rise in concerns regarding the fairness and transparency of the trading system. Several issues have been identified, ranging from Payment for Order Flow (PFOF) to conflicts of interest and the role of middlemen in the market. One proposed solution to address some of these issues is the new rule that Citadel cannot be the first to receive orders. Instead, orders must go to a public auction where everyone, including pension funds, has an equal opportunity to fill the order. This move towards transparency and fair competition is supported by many. The UK has effectively banned PFOF due to conflict-of-interest concerns, and some believe the US should follow suit. Brokers who do not accept any kind of PFOF route orders differently and consequently see superior execution quality. A recent study found that Robinhood, which relies heavily on PFOF for revenue, does not provide statistically significant price improvement relative to exchanges. Retail investors not dealing with PFOF get a better price than those dealing with it, which violates FINRA's Best Execution guidance. FINRA is currently evaluating the impact of not charging commissions on member firms' order-routing practices and decisions, and the findings should be made public. Some brokers, such as TD Ameritrade, claim to be motivated by competition, but their order routing decisions don't seem to reflect this. They pay to get the first look at orders, routing them to firms that net themselves billions of dollars in the process. Dark pools (Alternative Trading Systems) should provide quotes and trades to consolidated market data to bring more transparency to dark markets. The Commission should address the unfair information advantage of wholesalers by having brokers first route to the auction and specify where the order should go if the auction is unsuccessful. Wholesalers exercise extreme influence on other market participants, and there are conflicts of interest that may infect the ability of some participants to objectively review the rules. Removing middlemen from the market will improve prices for both individuals and institutions, such as pension funds. The auctions would save individuals billions of dollars taken by wholesalers. The state of American markets is anti-competitive, and fair competition is essential. The Commission needs to ensure fair competition, especially within the off-exchange systems that currently dominate. The proposed rule to bring more transparency to dark markets should be implemented as soon as possible. The SEC should investigate conflicts of interest among market participants to ensure that participants can objectively review the rules. Enforcement of SEC rules needs to be improved with higher fines to serve as a significant deterrent for breaking the law. Some broker-dealers should lose their licenses instead of receiving fines that amount to a cost of doing business. In conclusion, there are several issues facing the US markets that need to be addressed to ensure transparency and fair competition. The proposed solutions, such as the new rule for public auctions and the reduction of middlemen in the market, are steps in the right direction. The SEC needs to investigate conflicts of interest, improve enforcement, and ensure that rules are objectively reviewed to create a fair and transparent trading system.