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April 3, 2023

SEC Market Structure Reforms: Order Competition Rule

Better Markets filed a comment letter with the Securities and Exchange Commission in response to the proposed Order Competition Rule, one of four reforms to the structure of U.S. stock markets.  Under this proposal, stock orders submitted by retail investors to their brokers must be sent to public auctions where market makers, institutional investors, and others can compete to provide the best price.

Why It Matters.   When an ordinary investor asks his broker to buy or sell stock, that broker has the option of sending the order to one of several venues to be executed.  Most investors probably expect their brokers to send orders onto the well-known national exchanges like NYSE or NASDAQ.  But, in fact, a small group of powerful high-frequency trading firms, called “wholesalers,” scoop up and execute the vast majority of orders from retail-focused brokers.  The wholesalers do this largely through “payment for order flow” or PFOF given to the brokers, not because they always execute the investor’s order at the best price.  Most retail orders never make it to broader markets.

The SEC, several academic studies, and Better Markets all believe that ordinary investors leave money on the table under current market practices.  The auction mechanism in the Order Competition Rule would ensure that wholesalers face price-based competition for retail orders, and that competition will produce better prices for each transaction.  While those savings might be small on any individual order, they are enormous in the aggregate.

What We Said.  We strongly support the central thrust of the Order Competition Rule.  A few dominant firms have cornered the market for retail investor orders for far too long, and they have done so by creating conflicts of interest at the major stock brokers.  These conflicts have hurt not only the financial interests of ordinary investors but have made the overall stock market worse for mutual funds, pension funds, and the other vehicles that help convert Americans’ savings into real investment.  And the best part is that the rule does this by promoting market competition itself.

We know that the big incumbents will fling plenty of criticism at the SEC’s proposal to protect their monopoly profits.  But the SEC shouldn’t worry about these.  Forcing wholesalers to compete on even terms won’t mean that ordinary investors pay higher costs; they’ll only benefit from better execution of their trading strategies.  And the new rule should create wider liquidity for a wide variety of stocks across the national exchanges and other trading venues.  These benefits are captured in the SEC’s extensive economic analysis, and outside experts have corroborated the SEC’s projections.

Bottom Line.  The SEC estimates that its auction mechanism could save ordinary investors up to $2.35 billion each year.  The Order Competition Rule can and should ensure those savings are realized.

Read our full Comment Letter here or click the button below.

Comment Letters

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