individual_investor_letter

EMAIL SUBJECT LINE:
Re: File No. S7-32-22; File No. S7-31 -22; File No. S7-30-22; File No. S7-29-22


Dear Ms. Countryman,

As an individual retail investor, I thank you for the effort to create more competition and transparency in the market, and I appreciate the opportunity to comment on these proposals.

In aggregate, these recommended enhancements constitute one of the most significant changes to U.S. equity market structure since Regulation NMS was implemented in 2005. This is a very encouraging step forward. I would hate to see these rules watered down with exceptions, excessively narrow re-definition, and loose language.


Best Execution S7-32-22
FINRA has a best execution rule, but the SEC needs its own rule in order to enforce it. I support the Best Execution rule, but I don’t see how “conflicted orders” belong in a Best Execution rule. If payment for order flow continues, these “conflicted” brokers will continue to send our orders anywhere that gets them the most profit.

TD Ameritrade (which was recently acquired by Schwab) states on their website: “We believe that competition among market centers for our order flow serves to improve execution quality. We monitor order executions daily, monthly, and quarterly, and seek market centers that will provide quality executions for our clients on a consistently reliable basis.”

Looking at their most recent 606 report, it’s hard to believe competition is the motivation for their order routing decisions. In September 2022, there were dozens of registered exchanges and 69 registered Alternative Trading Systems. Despite the various routing opportunities, TD Ameritrade sent their equity orders to the same 3 venues for all of Q3 2022, with 80% going to just 2 firms: Citadel and Virtu. They each got around 40% of the orders, and the remaining went to Two Sigma Securities. They pay to get the first look at these orders, and to be able to trade against them or send them for execution where they choose, netting themselves billions of dollars in the process.

If you look at Virtu’s financial reports, they made $5.2 million A DAY in Total Adjusted Net Trading Income in 3Q 2022. Clearly this is a very lucrative arrangement for them.

Brokers who do not accept any kind of PFOF route orders differently and consequently, these brokers also see superior execution quality.

Various firms have already commented opposing The Proposals offered by The Commission. Indeed, these proposals are a clear threat to their earnings per share and annual bonuses.


Order Competition Rule S7-31-22
Investors should have access to the best priced quotations available in the national market system and such prices generally should be determined by competitive market forces.

Broker-dealers route more than 90% of marketable orders of individual investors in NMS stocks to a small group of six off-exchange dealers, often referred to as “wholesalers”. The wholesaling business is highly concentrated, with two firms capturing approximately 66% of the executed share volume of wholesalers as of Q1 2022.

Citadel recommended withdrawing this proposal for a number of reasons, including the unprecedented nature of requiring certain market participants to utilize a specific trading protocol.

Sending my orders to a wholesaler to be internalized is a specific trading protocol that I’d rather pay commission to be able to avoid. Citadel has been front-running customer orders since 2006 (https://files.brokercheck.finra.org/firm/firm_116797.pdf) and shouldn’t be allowed to have a monopoly on retail order flow.

The proposal allows for orders to go to Internalizers FIRST and then to the auction for fair competition. This still gives them a major information advantage which should be removed. Brokers should be routing directly the auction, and Internalizers should be able to trade with our orders competitively.

The proposal states that customers who make over 40 trades/day will not be subject to this rule but I think they should be covered under this rule as well.  Allowing as many orders as possible is beneficial for competition.

My only concern is that brokers will start charging outrageous commissions or fees in lieu of PFOF, so I’d recommend a cap on the amount of commissions or fees that the brokers are allowed to charge.

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. Monopolistic wholesaler dominance of order flow has damaged my faith in American markets, and I would love to see these rules put into effect (and appropriately enforced).


Disclosure of Order Information S7-29-22
The Commission is proposing changes to rule 605 of Regulation NMS to include more information about broker executions.

Currently, brokers have to file 606 reports quarterly.

In Dec 2022: FINRA, along with the SEC, sent out risk alerts regarding the lack of compliance with the 606 reports. In the report FINRA cited a list of issues with the 606 reporting compliance. The findings consisted of firms publishing inaccurate information in the quarterly report on order routing. There were also issues with Incomplete Disclosures – Not adequately describing material aspects of their relationships with disclosed venues in the Material Aspects disclosures portion of the quarterly report.

While I do support the idea and definitely agree with the need to be more transparent, one would expect brokers to be as non-compliant with the new 605 reports, and this will provide little to no benefit to retail. The 605 reports are only as useful as the accuracy of data it contains. Again, these rules would have to be appropriately enforced. As compliance to date has been embarrassingly low, the Commission should make it a priority to increase fines and penalties for violations. The lack of compliance with 606 reports communicates a tendency for funds and firms to send out bad data to obscure their own situation. Companies that sell market data are then damaged, as faith in the markets overall are damaged. Why pay for data if it’s full of lies?


Tick Sizes, Access Fees, and Transparency of Better Priced Orders S7-30-22
Rebates and other inducements in the marketplace are simply payment for order flow by another name. They lead to trading for the sake of volume.

I support establishing a variable minimum pricing increment model that would apply to both the quoting and trading of NMS stocks, which are stocks listed on a national securities exchange, regardless of trading venue.

The proposed amendments to Rule 610 would reduce the level of the access fee caps, which limit the fees that can be charged for trading against the best priced quotations displayed in any market. This is a start, but I’d like to see exchange rebates completely eliminated.

While PFOF is primarily seen as an off-exchange inducement to route orders to wholesalers, exchange fee structures and rebates play a similar role in order routing decisions.

These inducements should not exist and should be banned. The Commission and FINRA have long recognized the problems that these inducements create, and despite the best efforts of regulators, these problems have not been addressed or solved.

Access fee caps act effectively as a rebate cap.  As the Commission notes in the NMS Proposal: “analysis suggests that the primary reason that access fees remain near 30 mils on most exchanges is to fund rebates”.

As the Commission stated in harmonizing quote and trade increments for both on- and off-exchange trading, “investors may benefit overall from harmonizing trading and quoting increments regardless of the effect on price improvement because of the potential long-term competitive effects”.

The access fee cap should be complemented with a rebate cap for Wholesaler PFOF in much the same way that it constrains Exchange PFOF. A universal fee and rebate cap in this context would be sensible and consistent with the overall objectives of The Proposals.

Since exchanges are able to markup their market data costs between 201% and 4,891% while being allowed to pay rebates to brokers, the Commission should ensure exchanges are able to make money based on facilitating trading instead of charging monopolistic markups to sell firms their own data back to them. Therefore, based on current market access fee structures, 10 mils does seem like the right cap at this moment in time.

I’d recommend accelerating implementation of the revised round lot definition, and the odd lot dissemination on the SIP, as contained in the Commission’s Market Data Infrastructure Rule (“MDIR”). Two years ago, the majority of trades in the markets were odd lots (55%; from https://bettermarkets.org/newsroom/key-highlights-dennis-kellehers-testimony-march-17-house-financial-services-gamestop-hearing/).

Odd lots are now a majority of trades in the markets. Within some stocks, they are the vast majority. The exclusion of odd lots from the price of a stock amounts to the exclusion of most individual investors - most of the voting public.  Please look into a way to fairly and proportionately include odd lots in the calculation of the NBBO. If the Commission were to remove odd lot information from this rule, my faith in the U.S. markets would become even more damaged than it already is

I would support a structure that is clear and does not rely on vague language.  For example, some funds and firms might request language like "has a reasonable amount of liquidity at the NBBO".  Loose language makes enforcement difficult or impossible, and wastes taxpayer dollars on needless litigation time. Investors want to see results, not endless and wildly expensive slap-fights with Wall St. lawyers. Clear language and a clear and unambiguous tick size rule structure are strongly preferred. Please do not include vague language in the application of your rules.

I think it’s imperative that the Commission take these steps in order to start gaining back confidence and trust from the public. Seeing what happened with Gamestop eroded Investor Confidence so much that Investors have been taking their shares out of the system to hold them with a Transfer Agent. And due to the recent trouble in regional banks, the greater public is increasingly realizing the very serious and threatening difference between owning an asset and owning the right to an asset.

Every rule the SEC passes is only as good as the enforcement that backs it. Overall, I want to see higher fines that actually serve as a 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”. Restoring - and protecting - faith in the U.S. markets is more critical than ever.

I am sure this letter will be carefully considered. Thank you for the opportunity to comment.


Individual Retail Investor

Cc:
The Honorable Gary Gensler, Chair
The Honorable Hester M. Peirce, Commissioner
The Honorable Caroline A. Crenshaw, Commissioner
The Honorable Mark T. Uyeda, Commissioner
The Honorable Jamie Lizárraga, Commissioner