Mar. 31, 2023
In recent years, there has been growing concern over conflicts of interest in the routing of orders by brokers and wholesalers in the National Market System (NMS). In response, the SEC has proposed several changes to Alternative Trading Systems (ATS) rules, aimed at improving transparency and promoting fair trading practices. These proposed changes, if implemented, would benefit individual household investors. One way to reduce conflicts of interest is to increase transparency in the routing of orders by brokers and wholesalers. Investors should have access to the best-priced quotations available in the NMS, which would ensure that they receive the best possible execution for their trades. To achieve this, ATS should submit detailed disclosures about their operations, including how they manage conflicts of interest, how they operate their order routing practices, and how they handle customer orders. This would make it easier for investors to understand how ATS operate and how their orders are executed. Additionally, ATS should establish and enforce written policies and procedures to prevent fraudulent and manipulative practices. This would help to protect individual investors from abusive practices in the ATS market. ATS should also provide detailed information about the operation of their systems to the SEC, including data on the execution of orders, order routing practices, and information about the use of dark pools. This would improve the SEC's ability to oversee ATS and ensure compliance with regulatory requirements. It is essential that ATS operate in a manner that is consistent with the broader regulatory structure of the securities markets. This would promote fair and transparent trading practices, benefiting individual investors. One proposed change to achieve this is the implementation of a variable minimum pricing increment model for both quoting and trading of NMS stocks. This model would promote fair pricing across trading venues, ensuring a level playing field for all investors. Household investors support any initiatives aimed at identifying and preventing fraudulent practices that undermine the credibility, integrity, and functionality of American markets. As such, it is important to explore alternatives to sending orders to a wholesaler for internalisation. For instance, brokers may charge high commissions or fees in lieu of payment for order flow (PFOF), so a cap should be implemented. Research shows that estimated savings for retail investors range from $1.12 billion to $2.35 billion, primarily through increased competition to supply liquidity to marketable orders. Competition in the marketplace is necessary to regulate markets better, and barriers to competition, such as the conflicted nature of PFOF, should be removed. To conclude, the SEC should prioritize creating a competitive market structure that benefits investors and encourages transparency. The proposed changes to ATS rules, which promote better alignment with regulatory frameworks for exchanges, would be beneficial for individual household investors. By increasing transparency, implementing a variable minimum pricing increment model, and identifying and preventing fraudulent practices, the SEC can ensure that the American markets are fair and transparent, regaining public confidence and trust in the market.