Industry Groups Push Back on SEC's Proposed Equity Market Reforms

In response to recent SEC rule proposals aimed at reforming U.S. equity markets (see previous coverage), industry groups and market participants urged reconsideration of SEC proposals on best execution, variable minimum pricing for NMS quotations and trades, order competition and order execution disclosure. The public comment period for the proposals closed on March 31, 2023.

Regulation Best Execution

The SEC proposed new Regulation Best Execution to (i) establish a best execution regulatory framework for broker-dealers, government securities broker-dealers and municipal securities dealers and (ii) enforce written policies and procedures designed to comply with the best execution standard. Commenters provided the following feedback on the proposal:

• Investment Company Institute ("ICI"). ICI suggested that the existing FNRA and MSRB framework as well as the SEC’s enforcement mechanisms sufficiently protect the interests of investors. In the event that the SEC proceeds with its own framework, ICI advised the SEC to coordinate with SROs so that the best execution standard (i) includes factors consistent with FINRA’s best execution standard and (ii) includes a trade modifier indicating whether an order qualifies as a "retail" order.
• SIFMA. SIFMA asserted that the proposal is "unnecessary" because the current best execution rules already function effectively and recommended that the SEC withdraw the proposal.
• Managed Funds Association ("MFA"). MFA said that the proposal would create "undue overlap and uncertainty" and that, if the SEC declines to withdraw the proposal, the SEC ought to move forward with a proposal that (i) permits broker-dealers to weigh relevant factors when making best execution decisions and (ii) implements appropriate protections for institutional customers.
• Cboe Global Markets (joined by several investment firms) (collectively, "Cboe"). The commenters argued that the current regulatory framework is effective in providing investor protections. Additionally, they warned of the unintended consequences of implementing a best execution rule that is "overly prescriptive or overly vague."

Variable Minimum Pricing Increments for Quoting and Trading NMS Stocks

The SEC proposed amendments to Regulation NMS to adopt certain minimum pricing increments (i.e., "tick sizes") for the quoting and trading of NMS stocks. Commenters provided the following feedback on the proposal:

• Financial Information Forum ("FIF"). According to FIF, reducing minimum pricing increments ("MPIs") would cause firms to (i) experience a "significant increase" in message traffic and (ii) be forced to upgrade technology systems to account for the increased volume of market data and increased routing and quoting activity. FIF recommended that the SEC implement MPI reductions in a phased approach in order to monitor their impact on market resiliency.
• SIFMA. SIFMA called for further examination of the implications of amending tick sizes and emphasized that any planned adjustments require careful evaluation of projected impacts to assess the impact on market participants.
• MFA. MFA advised the SEC to (i) reduce the minimum tick size to a half-penny increment for tick-constrained securities, (ii) allow trade execution at prices finer than the applicable minimum pricing increment and (iii) cut back access fees proportionate to the reduction in tick sizes.
• Cboe. Instead of applying tick reform to an "expansive universe of securities," the commenters recommended the SEC use an "objective, multi-factor approach."

Enhancing Order Competition

The SEC's proposed Regulation NMS Rule 615 (the "Order Competition Rule") would establish regulations to "promote a more competitive, transparent, and efficient market structure for NMS stocks." Commenters recommended the following to the SEC:

• FIF. FIF characterized the proposal in its current form as "unworkable." FIF concurred with the comment letter submitted by NYSE Group, Charles Schwab & Co., and Citadel Securities (see previous coverage) that the SEC should not consider implementing the proposal until it can fully assess the impact of the proposed tick size and Rule 605 changes, if adopted.
• ICI. ICI supported providing institutional investors with increased opportunities to engage in retail order flow but expressed concern over whether the auctions would operate as intended under the proposal. As a result, ICI urged the SEC to re-evaluate its underlying assumptions of the auction mechanisms and to instead take a "simpler approach."
• SIFMA. SIFMA urged the SEC to withdraw the proposal, arguing that it would be detrimental to both retail investors and the equity markets because it would "harm competition among trading centers."
• MFA. MFA recommended that the SEC wait until the other proposals are implemented to consider the proposed order competition rule and cautioned against taking an "overly prescriptive approach."
• Cboe. The group asked the SEC not to move forward with the proposal and to instead consider other approaches toward improving retail investor execution quality that would not harm competition, liquidity or capital formation.

Disclosure Requirements Regarding Order Execution Information

The SEC proposed amendments to Regulation NMS Rule 605 ("Disclosure of order execution information") to update the disclosures required for order executions in NMS stocks. Commenters offered the following feedback:

• FIF. FIF supported updating Rule 605 reporting requirements to reflect changes in the market since the rule was first adopted in 2000 and asked that the SEC implement the proposal a year in advance of the rest of the related proposals in order to create a baseline comparison in market quality.
• SIFMA. SIFMA stated that it was generally in favor of updating Rule 605 but made several clarifying requests, including (i) requiring FINRA or the CAT to produce Rule 605 reports for all broker-dealers. Additionally, SIFMA outlined several operational issues, such as (i) the way in which the average effective over-quoted spread would be calculated for Rule 605 reports and (ii) proposed distinction between OTC market makers and single-dealer platform activities.
• MFA. MFA said that the SEC should prioritize the adoption of this proposal over the rest of the proposed rules and ensure that the proposal would not require order or execution management systems to provide Rule 605 reports.
• Cboe. The commenters supported updating Rule 605 but said that the SEC should first gather more "comprehensive execution quality statistics on retail activity," assess market quality based on the data, and then determine whether to move forward with the other related proposals.