order_auction_talking_points

SUBJECT LINE OF EMAIL: Re: Order Competition Rule, File No. S7-31-22, Release No.34-96495

OVERALL POINTS TO MAKE

Every rule the SEC passes is only as good as the enforcement that backs it. I want to see higher fines that actually serve as a significant deterrent.

I think some broker-dealers should lose their licenses instead of receiving fines that amount to nothing more than a cost of doing business - a cost that is often outweighed by the ill-gotten gains obtained through “honest mistakes”.

I fully support the rule, please implement it as soon as possible.

I deeply appreciate and support any efforts to reduce the speed games that damage the integrity, credibility, and functioning of American markets.

I deeply appreciate and support any efforts to reduce inducements and to reduce the ‘farming’ of individuals’ orders for rebate money.

A broker routing orders first to a wholesaler, who then passes them to the auction, which might route it back to the wholesaler, seems unnecessarily complex and also grants the wholesaler a profound information advantage against other market participants: they get to see orders well before anyone else. The Commission should address this unfair information advantage by having brokers first route to the auction and specify where the order should go if the auction is unsuccessful. That way the entire market has equal knowledge.

The current rule forces dark pools (Alternative Trading Systems) to provide quotes and trades to consolidated market data IF they wish to operate as an auction. I fully support and appreciate rule changes like this that bring more transparency to dark markets. The investing public should have easy access to what is happening within the markets.


COMPETITION IS GOOD

15 U.S.C. 78k-1 (“section 11A”) states that "It is in the public interest and appropriate for the protection of investors and the maintenance of fair and orderly markets to assure ... fair competition among brokers and dealers, among exchange markets, and between exchange markets and markets other than exchange markets." For too long the Commission has not be enduring fair competition, especially within the off-exchange systems that currently dominate. It's good to see they are beginning to take their mandate more seriously.

Monopolies are bad, and there is clear monopolistic behavior here. The Commission notes that 90% of marketable orders of individual investors in NMS stocks to a small group of six off-exchange dealers, and 66% is captured by just two firms. Those figures will be even higher for specific stocks. The state of American markets is clearly anti-competitive and that needs to change.

The current market is obviously not fair and this proposed rule is an important step in that direction. Fair competition is incredibly important and it’s good to see the SEC prioritizing true competition.

There are clearly some market participants benefitting from a dominant, anti-competitive position in the marketplace. They pay for order flow or secure it through backroom deals. Why can't orders compete in lit markets? They should - and it's good to see that the Commission finally realizes this.



Fragmentation of the markets makes things overcomplicated in a way that only benefits large, dominant players. I prefer a more simple, transparent, and free market structure like the one proposed in this rule.


WHOLESALERS ARE BAD

I would gladly pay more per share to avoid being routed through a wholesaler that has been charged over 70 times by the United States government (https://files.brokercheck.finra.org/firm/firm_116797.pdf).

I would gladly pay commission to avoid being routed through a wholesaler, especially one with a long record of flouting the law like Citadel Securities.

The parties involved have very clear conflicts of interest. Citadel is a large source of funding for many broker-dealers and is, for example, the NYSE's biggest customer. Wholesalers exercise extreme influence on other market participants and I am concerned that influence will infect the ability of some participants to objectively review these rules.

Research heavily suggests that internalization is bad for markets https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4070056

Wholesalers are lying about the quality of their services to maintain their profits and it makes me sick. For example, Commission analysis of CAT data in infra Table 20 found that, on average, 51% of the shares of individual investor marketable orders internalized by wholesalers are executed at prices less favorable than the NBBO midpoint. Out of these individual investors shares that were executed at prices less favorable than the midpoint, on average, 75% of these shares could have hypothetically executed at a better price against the non-displayed liquidity resting at the NBBO midpoint on exchanges and NMS Stock ATSs. (DON'T COPY THIS PART - this is a quote from dlauer so credit to him).

I dislike middlemen that simply exist to get their cut of a transaction that would otherwise occur. I would prefer that money go to pension funds instead of wall st billionaires.

The data clearly demonstrate that wholesalers are taking billions from individuals and institutions and calling it "superior performance". They might massage their numbers to protect their profits, but we know better. If they weren't around to take their cut, the savings will go to citizens and pensions instead of into Wall Steet's overstuffed pockets.

It is clear to me how removing the profiteering middlemen from the market will improve prices for both individuals and institutions (e.g. pension funds). Recent research by Hittal Mittesh suggests that on top of the Commission's estimate that the auctions would save individuals from billions of dollars taken by wholesalers, it would also save institutions over $1.5 billion each year. Wholesalers are taking from citizens AND people's pensions - that needs to stop.
Citation: https://4982966.fs1.hubspotusercontent-na1.net/hubfs/4982966/BestEx%20Research%20Order%20Competition%20Rule%20Analysis%2020230105.pdf