On December 14, the SEC will vote to consider the much-anticipated new market structure rules/amendments.  Here’s what we know and what we don’t know:

What We Know

According to the SEC’s Open Meeting Agenda , the proposal will include four items:

1. Disclosure of Order Execution Information – expand the scope of entities subject to Rule 605, modify the information required to be reported under the rule, and change how orders are categorized for purposes of the rule.
2. Regulation NMS updates – variable minimum pricing increments for the quoting and trading of NMS stocks, reduce access fee caps, and enhance the transparency of better priced orders.
3. Order Competition Rule – require certain equity orders of retail investors to be exposed to competition in fair and open auctions before such orders could be executed internally by any trading center that restricts order-by-order competition.
4. Regulation Best Execution – establish a best execution standard and require detailed policies and procedures for brokers, dealers, government securities brokers, government securities dealers, and municipal securities dealer.

What We Don’t Know

1. How many pages will the proposal be and how long will the comment period be?  Considering that Reg NMS was 523 pages, we expect this proposal to be at least the same length and probably longer.
2. How many lawsuits will be filed? There has already been one lawsuit and we expect the status quo defenders to file numerous more lawsuits even before the comment period ends. Isn’t it sad how litigious our industry has become.
3. The details – We really don’t know any of the details yet. What will the access fee cap be? Will the recommended minimum pricing increments be 1/10 penny, ½ penny or a variable smart tick proposal? Who will be responsible for running the retail order auction? What is the difference between the current FINRA best execution rule and the proposed SEC best execution standard? 
4. How will the SEC commissioners vote? Will they vote on party lines? We hope not because market structure shouldn’t be a political issue.
5. How many industry friendly journalists will write articles declaring the SEC proposal is “dead on arrival” even though they haven’t even read the proposal?
6. How many politicians will write letters to the SEC demanding “empirical evidence” of the suggested changes? After reading these letters, we always like to check to see who are the biggest donors to these politicians.
7. Why was the term “payment for order flow” not part of the Open Meeting agenda? In his June 8th speech, Mr. Gensler seemed to be pretty clear about his feelings on payment for order.:

“Payment for order flow can raise real issues around conflicts of interest. As described in the Commission’s settled enforcement action against Robinhood in 2020, payment for order flow can distort routing decisions…As the staff wrote in the GameStop report, payment for order flow may incentivize broker-dealers to use digital engagement practices, such as gamification, to increase customer trading…I’ve asked staff to make recommendations around how we can mitigate conflicts with respect to payment for order flow and rebates.”

Our Thoughts

While it’s taken a long time, we’re very happy that the SEC is finally going to propose some enhancements to the US equity market. We have no doubt that detractors will say that the proposal is a “solution in search of a problem” and “why fix what is not broken” but we think that most market participants will agree that our market can use some improvements. We think most market participants realize that finding liquidity has gotten much harder to do over the past few years. And we think most market participants would agree with Gary Gensler when he said in his June 8^th speech:

“It’s not clear, with such market segmentation and concentration, and with an uneven playing field, that our current national market system is as fair and competitive as possible for investors.”

We hope this proposal stirs a lively debate and that all market participants are encouraged to comment. We’re definitely looking forward to commenting.