Three Firms Urge Revised Approach to SEC Trading Rule Proposals

In a joint comment letter responding to four SEC rule proposals aimed at reforming the structure of U.S. capital markets (see related coverage), the NYSE Group, Inc., Charles Schwab and Citadel Securities expressed "deep concern" and urged extensive revisions. The commenters recommended an approach aimed at: (i) enhancing public investor interaction, (ii) maintaining opportunities for retail price improvement and (iii) improving the National Best Bid and Offer ("NBBO") as a meaningful benchmark for execution quality.

Minimum Pricing Increments, Access Fees and Round Lots

The commenters recommended that the SEC:

• reduce the minimum quoting increment to a half-penny for "tick-constrained" symbols (i.e., symbols that "have an average quoted spread of 1.1 cents or less and a reasonable amount of available liquidity as the NBBO") that are trading at or above $1.00 per share in order to narrow the number of symbols covered by the SEC proposal;
• establish a market-wide harmonized trading increment of $.001 for all symbols trading at or above $1.00 per share;
• reduce access fees to an amount that is "proportionate to the proposed reduction in minimum quoting increment for tick-constrained symbols"; and
• accelerate the implementation of the revised definition of "round lot" but not the odd lot dissemination on the securities information processors.

Disclosure on Order Execution

The commenters emphasized support for improvements to execution quality disclosure but asked the SEC to consider comments from market participants on technical suggestions to amend proposed Regulation NMS Rule 605 ("Disclosure of order execution information").

Retail Auctions

The commenters urged the SEC to withdraw proposed Regulation NMS Rule 615 (the "Order Competition Rule") due to the "unprecedented" requirement imposed on market participants to comply with a specific trading protocol. The letter stated that before implementing the proposal, the SEC would need at minimum (i) a full assessment of how the execution quality would be impacted by the narrower quoting increments and modernized round lot definitions and (ii) a "more credible economic analysis" on changes to order execution.

Best Execution

The commenters urged the SEC to withdraw its proposed Regulation Best Execution because of the "overly prescriptive and impractical requirements" for managing the SEC's newly termed category of "conflicted transactions." Instead, the letter called for updates to current best execution requirements consistent with the aforementioned proposal on tick size, access fee and order execution disclosures.

The commenters also recommended a measurement period for regulators to assess market impact.