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“Gary Gensler is set to speak before the House Financial Services Committee today, however, expectations seem muted that we’ll get any direction on policy proposals. With a flurry of comment and responses in the past two weeks it will be interesting to see if he addresses any of the specific comments.
“The most shocking of those comments coming from the exchange participants, who seemingly would benefit in a concerted effort to move volumes back to exchange from off. The fact that the exchanges would show apprehension to a plan that would seemingly boost their revenues is telling in itself.
“But couple that with a growing chorus of the same sentiment from all sorts of market participants, and the likelihood of forced exchange auctions, inserted into the current PFOF structure for execution, seems to be getting less and less. And if it were to move forward, prolonged legal wrangling will follow in kind.”
“The four market structure proposals are as follows:
- Enhancing Order Competition: A severe shakeup of the current PFOF structure, with a heavy/questionable implementation, and the least likely to see through to implementation – essentially forcing retail orders to exchange for auction execution.
- Tick Size and Access Fees: A proposal of three key parts. First, adopt minimum variable pricing increments (MPI’s)/tick sizes for quoting and trading NMS stocks. Second, reduce access fee caps from 30mils to 10mils. Third, introduce new odd-lot best bid/offer benchmark – not an easy pass to implementation either as wholesaler margin is reduced by reducing spread opportunity and thus possibly reducing the liquidity, while also possibly offering less liquidity at a price point as well.
- Best Execution: The SEC’s foray into a clear definition of Best Execution. Currently in place at FINRA and largely in place by practice of 2005’s Reg NMS Order Protection Rule, with a costly budget to implement (SEC has at $700mm)
- Execution Transparency Disclosures - A refinement to Rule 605, in an effort to modernize reporting and providing better transparency. This has widespread support - enhanced quality execution statistics is hard to argue against.
“Gensler’s primary objective is to move volumes back to exchange, and in the process, reduce what may be perceived as an anti-competitive wholesale market maker arena. The retail trader currently enjoys zero commission trading, obtainable markets, unlimited size in 10,000+ listed stocks and ETF’s, at prices that are at or better than institutions receive – bringing complexity and regulation to that backdrop is getting the expected response.
“The ball is now in the SEC’s court, as the comment period has been robust in a relatively condensed time window. The dissent ranges in conviction to the varying proposals, but it is clear and from a wide swath of industry participants. Concerns runs the gamut, all the way from technology infrastructure to potentially anti-competitive ramifications (hurting best execution efforts). This will be Gary Gensler’s House Financial Services Committee testimony since the 2021 meme-stock frenzy. Whether new insight be provided remains to be seen.”
