Mar. 31, 2023
Dear Ms. Countryman, I appreciate the chance to share my thoughts on these proposals. Collectively, the proposed changes represent some of the most significant adjustments to U.S. equity market structure since the implementation of Regulation NMS in 2005. It is an encouraging development, and I hope that these regulations are not disempowered with exemptions or ambiguous language. Best Execution S7-32-22 Although FINRA has a best execution rule, it is crucial for the SEC to establish its own rule for effective enforcement. I support the Best Execution rule, but I question the inclusion of "conflicted orders" within it. If payment for order flow persists, "conflicted" brokers will continue routing orders to wherever maximizes their profit. TD Ameritrade's (recently acquired by Schwab) website states that competition among market centers for order flow helps improve execution quality. They claim to monitor order executions daily, monthly, and quarterly, seeking market centers that consistently provide high-quality executions for their clients. However, their latest 606 report suggests that competition may not be the driving force behind their order routing decisions. In September 2022, despite numerous routing options, TD Ameritrade sent their equity orders to the same three venues throughout Q3 2022, with 80% going to Citadel and Virtu. These firms pay for the privilege of first access to these orders, generating billions in revenue by trading against them or directing their execution. Brokers that do not accept payment for order flow tend to route orders differently and often achieve better execution quality. Several firms have already expressed opposition to the Commission's proposals, as they threaten their earnings and bonuses. Order Competition Rule S7-31-22 Investors should have access to the best-priced quotations in the national market system, determined primarily by competitive market forces. More than 90% of individual investors' marketable orders in NMS stocks are routed to a small group of six off-exchange dealers, commonly known as "wholesalers." The wholesaling business is highly concentrated, with two firms accounting for about 66% of wholesalers' executed share volume in Q1 2022. The proposal permits orders to be sent to Internalizers first, then to the auction for fair competition. This still grants them a significant informational advantage, which should be removed. Brokers should route orders directly to the auction, allowing Internalizers to compete fairly with our orders. The proposal exempts customers making over 40 trades per day from this rule, but I believe they should also be covered. The current market is far from fair, and this proposed rule is a crucial step toward leveling the playing field. I am glad to see the SEC prioritize genuine competition. Monopolistic control of order flow by wholesalers has undermined my confidence in American markets, and I hope to see these rules enacted and enforced effectively. Disclosure of Order Information S7-29-22 The Commission proposes amendments to Regulation NMS Rule 605 to enhance the transparency of broker executions. At present, brokers are required to submit 606 reports on a quarterly basis. In December 2022, FINRA and the SEC issued risk alerts addressing non-compliance with 606 report submissions. The report by FINRA highlighted several problems concerning compliance with 606 reporting, including firms providing incorrect information in their quarterly order routing reports and inadequate disclosures—failing to sufficiently describe material aspects of their relationships with disclosed venues in the Material Aspects disclosure section of the quarterly report. Although I support the concept and recognize the importance of increased transparency, it is likely that brokers will exhibit similar non-compliance with the new 605 reports, providing minimal benefit to retail investors. The utility of 605 reports depends on the accuracy of the data they contain. Consequently, proper enforcement of these rules is essential. Given the disappointing levels of compliance thus far, the Commission should prioritize imposing stricter fines and penalties for violations. Non-compliance with 606 reports suggests a propensity among funds and firms to disseminate poor-quality data to conceal their circumstances. This, in turn, undermines companies that sell market data and erodes overall confidence in the markets. After all, why invest in data riddled with falsehoods? It is crucial for the Commission to implement these measures to regain public confidence and trust. The GameStop incident significantly undermined investor confidence, prompting them to withdraw shares from the system and hold them with a Transfer Agent. Additionally, recent issues with regional banks have heightened public awareness of the substantial and concerning distinction between possessing an asset and holding the right to an asset. The effectiveness of every SEC rule relies on the enforcement supporting it. Ultimately, I advocate for increased fines that serve as a genuine deterrent. In some cases, broker-dealers should face license revocation rather than fines that merely function as a cost of doing business—a cost that is frequently offset by the profits gained from so-called "honest mistakes." Now, more than ever, it is vital to restore and safeguard trust in the U.S. markets. I appreciate the opportunity to share my thoughts. Sincerely, Individual Retail Investor