Witnesses Criticize SEC Equity Market Structure Proposals

Witnesses before the House Financial Services Subcommittee on Capital Markets ("the Subcommittee") criticized the SEC's equity market structure proposals. (See Committee Memorandum.) 

As previously covered, in December 2022, the SEC proposed four new rules aimed at reforming the structure of US capital markets. The SEC proposed changes to (i) Regulation Best Execution, (ii) Variable Minimum Pricing Increments for Quoting and Trading NMS Stocks, (iii) Enhancing Order Competition and (iv) Disclosure Requirements Regarding Order Execution Information. In October 2023, the SEC proposed another equity market structure rule intended to address volume-based pricing. In March 2024, the SEC unanimously adopted amendments to update Regulation NMS Rule 605 ("Disclosure of order execution information")

In remarks at the hearing titled "Solutions in Search of a Problem: Chair Gensler's Equity Market Structure Reforms," Chair Ann Wagner (R-MO) criticized the proposals for failing to identify the problems they seek to address and for failing to provide any clear evidence of benefits. She highlighted the strength and liquidity of America's capital markets, noting their positive evolution over the past 20 years and the significant growth in retail trading due to zero-commission trading. She expressed concern that the SEC proposals could disrupt the market structure and harm retail investors, especially since the economic impacts of these proposals are largely unknown and based on outdated data.

The following witnesses testified:

• Professor of Economics at the University of Utah, Jonathan Brogaard argued that the SEC proposals rest on flawed economic analysis of the current market structure and are "anti-competitive." Mr. Brogaard advised that the SEC should "slow the pace of regulatory reform" until new data "can be used to establish key market baselines and adequately inform the SEC's economic analyses of any proposed reforms." 
• Co-Founder and Chief Executive Officer of Global Trading Systems, Ari Rubenstein argued that the various SEC proposals lack "analysis of cumulative costs and benefits" and have "the potential for unintended consequences across asset classes and market sectors resulting from the interaction among the proposals." Mr. Rubenstein asserted that "market structure changes should be approached with careful analysis and precision" and that the SEC should focus on empirical data to support further regulatory action.
• Executive Vice President, Head of North American Market Services of Nasdaq, Kevin Kennedy, commenting on behalf of the Equity Markets Association, asserted that the SEC "chose to break up into pieces its market structure reform proposals even though they are clearly and inextricably intertwined." Mr. Kennedy said that "the proposals would do little to support the transparent, accessible, and publicly displayed portion of the U.S. equity markets ... which are its bedrock."