Feb. 23, 2023
February 23, 2023
I feel that best execution for retail investors in the stock market is incredibly important. Recently, after looking into how my investments are handled by broker-dealers, I was dismayed to learn that they can internalize or route to dark pools when stock purchases are made. Ostensibly, broker-dealers have made the argument that these actions are to provide \"liquidity\" or to \"prevent volatility\". I'll address each separately, as I feel both arguments, and the act of retail stock purchases not getting best execution both diminishes our investments and circumvents any semblance of a free and fair market.
First, internalizing orders to create liquidity. I do not understand why liquidity is a desirable outcome for retail investors. If liquidity can be created, by definition it means that the market is not functioning as intended. Injecting liquidity into the market does not allow free and fair price discovery. If purchases of a particular stock are so voluminous that a broker dealer cannot fulfill all orders, the price will continue to rise until such time that buying pressure lessens or slows and broker dealers can fulfill all orders. Liquidity only serves broker dealers, as they make money off of executing orders, irrespective of market conditions. This is directly adversarial to the concept of buy and sell pressure on a stock functioning as expected. If orders are internalized or sent to dark pools, they do not go to a lit market, and therefore do not affect price discovery. This scenario objectively benefits broker dealers and objectively affects retail investors negatively. Someti
mes, best execution is that an order cannot be filled because a broker does not have the stock available.
Secondly, any effort intended to reduce volatility again only benefits broker dealers and adversely affects investors. Volatility is not a negative outcome in the market, it is a feature that should function as it happens. Wanting no volatility is important for those that want to time the market and protect their bets on how the market will behave. If markets are not allowed to be volatile, or efforts are made to prevent it from being volatile, it also means that best execution is not being delivered to retail investors. If so many people are selling or buying a stock that the price is volatile or is halted, those are features of a free and fair market.
I do feel that best execution for retail investors should allow markets to function naturally, not in a controlled manner. A controlled market in terms of behavior, liquidity (and therefore, price discovery) does not and will never benefit the retail investor, and only affects broker dealers that benefit from every order they execute. I urge the SEC to allow our markets to function as intended not the way broker dealers would prefer to support their current business model, which is at the expense of retail investors.