Creating Risk by Fixing What’s Not Broken

Industry Perspectives on the SEC’s Four Equity Market Structure Proposals

In this episode of The SIFMA Podcast, SIFMA President and CEO Kenneth E. Bentsen, Jr. sits down with our team to discuss the potential impacts of the U.S. Securities and Exchange Commission’s far-reaching equity market structure proposals and walk through our recently filed comment letters.

Ellen Greene, Managing Director, Equity and Options Market Structure, Chris Killian, Managing Director, Securitization and Corporate Credit, Leslie Norwood, Managing Director and Associate General Counsel, Municipal Securities and Bill Thum, Managing Director and Associate General Counsel in SIFMA’s Asset Management Group to discuss the potential impacts of the proposals on investors and other stakeholders. Individually and together, they raise serious concerns that would result in fundamental changes with uncertain and consequential results.


Ken Bentsen: Thanks for joining us for this episode and SIFMA’s podcast series. I’m Ken Bentsen, SIFMA’s president and CEO.

I’m joined today by my SIFMA colleagues for a conversation on the SEC’s Equity Market Structure proposals. Our participants today include Ellen Green, Managing Director, Equity and Options Market Structure, Chris Killian, Managing Director, Securitization and Corporate Credit, Leslie Norwood, Managing Director and Associate General Counsel, Municipal Securities, and Bill Thum, Managing Director and Associate General Counsel in our Asset Management Group. Thank you all for joining me today.

In particular, we’re going to discuss the potential impacts of the proposals on various stakeholders, including investors, which is an area of great concern to us. So, let’s jump right in. Ellen, can you walk us through what the SEC proposed?

Ellen Green: Yes, Ken. On December 14, 2022, the SEC issued four proposals that will completely overhaul how the U.S. equity markets operate.

The proposals cover the disclosure of order execution information or updates to Rule 605, which was adopted in 2000. Rule 605 computes execution quality for retail orders, and the proposal would expand to include measurements such as size improvement for orders, retail brokers, and order types not included today such as stop and non-market orders and additional order sizes like odd lots and fractional shares.

The second proposal, tick sizes, access fees and transparency of better-priced orders would overhaul how tick sizes and access fees are managed today. This proposal would include smaller, harmonized tick increments, updated access fees, odd lots on the SIP, and redefined round lots.

The third proposal, Regulation Best Execution, would introduce an SEC rule despite FINRA and MSRB having robust rules which brokers follow today. The proposed rules would apply a best ex duty to brokers in all securities including bonds, stocks, options and crypto. The proposal introduces the concept of conflicted order flow for retail brokers whose orders receive exchange rebates or payment for order flow.

Lastly, the enhanced order competition, new retail auctions or, as it’s affectionately referred to, the “order competition rule”, which would introduce the concept of segmented orders for retail and would require these retail brokers to submit almost all orders to the exchanges to compete in auctions.

Ken Bentsen: Ellen, notwithstanding the pretty broad reach of each of these proposals – certainly three out of four of them – SIFMA over the last decade presented, I think we put forth three different white papers on potential changes to Reg NMS and that’s been a priority for our trading and markets committee and for our board. Why is that important?

Ellen Green: SIFMA really supports a measured data-driven approach to US equity market structure. Reg NMS was adopted 22 years ago, and since that time, the market’s technology has really advanced, and it’s time to look at the markets and create open dialogues through roundtables and other forms to allow all impacted stakeholders to provide input on equity market structure.  As Chair Gensler noted when the proposals were issued, our equity markets have been transformed by these technologies that we’re discussing and along with the new technologies we’ve seen in evolution in business models. Current rules 605 disclosures have not kept up with the markets and today the information included that in them provides an incomplete picture of execution quality. SIFMA thinks that it’s critically important to update these disclosure rules so that investors, regulators, and brokers are better able to understand the execution quality that retail is enjoying today. We also support decreased access fees and tick sizes and believe that both of them shouldn’t be static but, there could be additional tick sizes such as half a penny in addition to the one penny we have today, and we think that it’s critically important that all market participants are able to access the markets at a reasonable cost.

Ken Bentsen: Of course, the SEC is gone much further than that. I mean, beyond the 605, right? They’ve come out with a fairly prescriptive tick size proposal, and in particular, a very prescriptive best execution proposal, on top of existing, as you pointed out, existing FINRA and MSRB best execution requirements. And then further, a very novel order by order competition proposal. What are SIFMA’s views on those?

Ellen Green: There is broad agreement that there are tick-constrained names which could potentially benefit from a quoting increment that is smaller than one cent. However, consistent with SIFMA’s recommendations, the SEC should not make changes to quoting increments or other aspects of equity market structure prior to updating Rule 605.

At that time, after careful consideration, analysis, and stakeholders’ input, should the SEC proceed with any changes. Any modification of the tick size for NMS stocks could have significant implications for both the issuer and those trading securities. So, it is critical that the SEC take a cautious approach to tick sizes to mitigate any potentially adverse or unintended consequences.

SIFMA finds the tick sizes recommended in the proposal to be too granular and has concerns similar to those identified when Reg NMS was implemented that these smaller ticks could lead to fragmented liquidity and pennying since firms can jump ahead of an order for an economically insignificant amount. SIFMA recommends that the SEC adopt half penny quoting increments for a small group of tick constraint sticks but only after the SEC has adopted the appropriate metrics to determine which securities are indeed tick-constrained.

SIFMA supports the SEC’s recognition that the one-size-fits-all minimum pricing increment and 30 cents per hundred access fee cap are outdated. SIFMA supports the use of updated 605 data and quantitative analysis to determine the appropriate access fee and believes they should be tied to the ultimate determination of what the most appropriate tick sizes should be. SIFMA also supports the acceleration of variable round lots and inclusion of odd lot information as part of consolidated market data, but has some concerns with the proposed inclusion of best odd lots as part of the consolidated market data.

Bill Thum: Hey Ken, I’ll jump in here from SIFMA AMG’s perspective. We’re the voice of the asset management industry. So, as we represent our retail investor clients, our interests are aligned with the SEC’s overall objectives to enhance transparency and price discovery.

We look at these proposals and indeed it would have been very helpful to have the data that the SEC based these on. It would be helpful to have an analysis of how the different proposals interact. and what the cost and benefits of those are. And I think our members and the interests of the retail investors are very well served by certain of the proposals and we have serious questions about other proposals.

Obviously, the starting point from our perspective is the more information that will be provided under the revisions to rule 605 and we think that that really will help inform the SEC as to whether or not there are gaps in the other areas that should be addressed. Likewise on tick sizes, we think that there are tick-constrained stocks that should be reassessed. However, rather than use the prescriptive approach that the SEC has come up with, we think there really should be public roundtables and input from market participants to really identify what the tick-constrained stocks are, what the appropriate tick size is, and so on. As we get to the other proposals, the order competition rule, the best ex rule, the order competition rule, which arguably is meant to benefit the retail investor, we really have concerns that retail investors will have access to those auctions that are being promoted, mandated by the exchanges. So, I’m not sure that the commission’s objective, which of course is well-intentioned, will actually serve the retail investors.

And on the best execution rule, as far as we’re concerned, while we support best execution, we already have two regimes which the SEC oversees. If there are problems there, we think the SEC should probably focus on what those problems are, identify them, focus on what the problems are, and fix them, rather than propose a wholesale new regime that then market participants have to look at three different regimes to comply with.

Ken Bentsen: Those are important points, Bill. And I want to go back to a point you make coming from the buy side, because in particular, when you think about what the SEC says, what their motivation is in pursuing this is, in their view, to enhance competition in the marketplace, although in the rule proposal itself, they point out that the marketplace is already extremely competitive, which I think we all agree that it is. The most competitive it’s been in the history of the U.S. equity markets and the most efficient. When you think about the order by order competition rule, or the order competition rule, the Commission premises a great deal of that on the theory that there is a tremendous amount of resting liquidity on exchanges, primarily among institutional buy side investors that would like access to retail order flow. But it seems that what we hear, and in fact, there are already programs, the RLP program, that a few of the exchanges run, I don’t know that they’ve been modestly successful. But it seems to be a mismatch because what we hear from buy side firms is they’re not necessarily looking to engage with the volume of retail order flow, and they have the ability to engage with that order flow. So, are we trying to fix something that’s not necessarily broken here?

Bill Thum: I think that that’s exactly it. Of all the proposals, I think the buy side is most concerned about that because we really see it forcing the market toward a trading facility that perhaps we don’t really have that great of access to and therefore constraining us from trading otherwise.

We’d rather see if indeed liquidity is going to develop that it develops organically and not subject to a mandate. So, I think it’s well intentioned. The reality is, we don’t see the need and we are seriously concerned that it could actually serve to limit liquidity as liquidity providers may not want to direct liquidity to a system that retail investors can’t access.

Ken Bentsen: You obviously have a long history, both in the exchange, around exchanges as well as in the options market. In a sense, the proposal seeks to create an options-like auction mandate. But how is this proposal different from how the options market works? And what are the risks and how it’s designed?

Bill Thum: Hey Ken, at least from our perspective, you know the need to create the operational linkages to the various auctions that may pop up on an ad hoc basis and require response time of under 300 milliseconds, you know, is really going to be a complex thing for most retail investors to gain access to. So, I think in theory, you know, perhaps an auction could add some value, but the mandate of moving the market to it, prematurely, and given the operational and practical connectivity issues, it really doesn’t serve as the answer.

Ken Bentsen: Right, and notwithstanding concerns we have about the SEC’s cost-benefit analysis and Ellen mentioned this, we have four different proposals that interact with one another, and yet the SEC failed to conduct a holistic cost-benefit analysis of how these rules work together. But even in the individual cost-benefit analysis, in one sense using outdated 605 data and two, using data which nobody else has access to or can recreate, which creates a whole other problem.

The SEC makes the case with a fair amount of caveat that it could result in savings in the aggregate of about one and a half billion dollars. But what they fail to mention is even were that to be true, it’s not evenly dispersed. So, there could be winners and losers within that range. I think more importantly, there’s a fair amount of independent academic research, recent academic research in the last, you know, really several months since the SEC signaled they were going to come forward with these proposals, that really challenges those numbers and takes the other side of the argument, Bill, as you’re sort of pointing out, that in fact, this could end up costing investors billions of dollars in either lost opportunity cost in terms of the so-called winner’s curse, if you will, through an auction program or you know lost execution quality if the auctions fail to work out.

Let’s pivot to our other guests, Leslie and Chris.

Leslie and Chris, you all are both active in our fixed income space and in the, munis, corporates, mortgage backs, govies, agencies. As has been mentioned, the industry operates under a best execution regime overseen by FINRA, the self-regulatory organization for the brokerage industry and the municipal securities rulemaking board, the self-regulatory or independent regulatory organization overseeing the municipal market. As Bill mentioned, both of those entities are heavily overseeing and regulated by the SEC, so they effectively stand in the shoes of the SEC as the primary regulator of dealers and both have very robust best execution rules. The SEC would propose its own best execution rule on top of those. Notably, nowhere in release, I believe, does the SEC suggest that they would seek to have FINRA or the MSRB withdraw their best execution rules. So that you could end up with three redundant or even worse conflicting best execution rules, which would be pretty counterintuitive to what you’re trying to accomplish. But so that’s one thing, but perhaps more importantly, the substance of the SEC’s rule seems to be much more prescriptive as opposed to a more principle-based approach that FINRA and the MSRB have, again, subject to SEC oversight. Maybe Leslie and Chris, you all could provide some more color on that from your perspective.

Chris Killian: Sure. You know, SIFMA members have always believed that having robust best execution process is essential. Investors need to be certain that when they trade with broker dealers, place orders with broker dealers, that the dealers are going to get them the best price. This process exists today, Ken, like you mentioned.

FINRA does have a best execution rule. But even beyond that, it’s important to keep in mind that fixed income is different than equities. So best execution isn’t just FINRA’s Rule 5310. Best execution really is kind of putting together Rule 5310, Rule 2121 that relates to fair pricing, 2232 which covers markups, and 2111 and suitability. And all of those things work together to make sure that customers are getting the best price.

And like I said, fixed income securities are a lot different than Reg NMS equities. There are millions of QSIPs versus 40,000 equity QSIPs there. There isn’t widespread exchange trading. Trades tend to be bigger as opposed to smaller in many of the markets anyway. And like you also mentioned, you know, fixed income is primarily a principal market in most places. So, you know, all of those differences require a different type of best execution than what might be appropriate for, you know, trading Ford Motor Company’s stock. And that’s what we have today.

As you mentioned, to the extent you end up with three different rules, that’s just a lot of cost without much benefit. And while we’ve seen comments from the regulators at FINRA and the MSRB, I believe Leslie can correct me, that they would align their rules with whatever the SEC ended up doing here. You know, first, there’s no promises of perfect alignment. And second, you know, the actual examiners that work for FINRA and the MSRB that have been going into dealers for the last 15 years doing exams on this are going to have to basically be retrained and come up with whole new sets of interpretations and all of that and the question is really why. What regulatory gap was identified that requires this to happen? And the answer in our view is that there isn’t one.

Leslie Norwood: At least on the MSRB end, you know, we went through a very prolonged and rigorous rule development process really heightened through 2013 through 2019 developing not only the best execution rule on both the MSRB side and the FINRA side, but a panoply of associated guidance, which the industry has taken a lot of time and expense to implement. This seems like a very short period of time to review that process.

On the MSRB front, municipal broker dealers are subject to not only MSRB Rule G-18 on best execution, but also G-19 on suitability, G-30 on fair pricing and commissions, G-15 on markup disclosures, as well as G-27 on supervision, as always. And FINRA conducts surveillance, examinations, and enforcement on all of these rules.

Really, the fixed income dealers have developed all of these systems. It’s very robust. And I think there’s a question as to what exactly the SEC wants beyond the already established best execution. Is there such a thing as “bester execution”? And I think we really question that, because the SEC has not articulated the need or justification for the separate SEC level best execution rule for brokers and dealers, especially, you know, FINRA, which already examines and enforces both its and the MSRB’s rules.

Really, we think that this rule or proposal inappropriately attempts to apply the equities market concepts to fixed income markets, where those concepts really just do not fit. As Chris just stated, the conflicted transactions of the proposal really just don’t work here and aren’t justified for fixed income securities, primarily because virtually all fixed income securities transactions occur on a principal basis.

Ken Bentsen: So, following up on that, I mean, I want to reiterate the point. And you talked about all the various rules of both the MSRB and FINRA. All of those were ultimately approved by the SEC. So, it’s not that FINRA and MSRB rules are somewhere out in the ether, separate and apart from the SEC. They were completely blessed by the SEC through an ongoing process and would not have come into effect without the approval and blessing of the SEC.

But you make an important point about principal basis. The SEC rule is designed for the retail market. However, they do ask the question whether or not it should apply to the institutional market. Maybe explain what the problems are with that.

Chris Killian: I think in looking at what the SEC proposed, they do propose that there’s a carve-out for institutional investors from the best execution requirements. We’re going to have comments to them that if they put this rule in place, which, as we just discussed, it doesn’t seem necessary, but if they did what the confines of that carve-out should look like. Leslie could talk more in the muni market – there is an exemption for sophisticated municipal market participants and the rationale behind that, generally speaking, is that institutional investors oftentimes may have more information than any other broker dealer they’re talking to because they talk to seven different broker dealers about a particular trade they want to do and they are able to make their own analysis and do their own homework and don’t need the same level of protection that, say, you or I do if we’re calling our broker to trade a stock as an individual. That’s basically the rationale for it.

I think if you were to extend the full panoply of things that the SEC has proposed that apply in the retail context in their conflicted transactions discussion, it’s just an exceedingly high burden for transactions where the counterparties don’t need and probably wouldn’t even necessarily want all of those extra steps to go through because one thing to keep in mind here is best execution isn’t just about the price, right? It’s about getting the trade off and the timeline that you want to get it off and the size you want to get it off with the counterparties that you might want to use. It’s a little narrow if you’re just looking at some price metric.

Leslie Norwood: I completely agree, Chris. One other thing I’d like to point out is that the SMMP definition for municipals under MSRB Rule D-15 is different than the institutional customer definition in FINRA 4512. And so, we would hope that if the SEC does go down this path, that there is harmonization of those definitions. One thing that becomes very difficult for the broker dealers is if there is no market-based rationale for differences in the rules that we would encourage harmonization when and if possible to ease compliance with the rule and reduce costs.

Ken Bentsen: Bill, maybe one last thing on this issue. You represent institutional investors whose clients are retail investors at the end of the day. But obviously, our asset management members are very sophisticated investment companies that, to Chris’s point, are in the markets on an ongoing basis. How do our AMG members look at this?

Bill Thum: Well, I think on the AMG side, I think we echo many of the thoughts that have already been expressed. Obviously, we’re fiduciaries on behalf of our retail investors, so we have our own obligations with respect to best execution. We haven’t seen the gaps in terms of the rules and responsibilities for the sell side and are somewhat mystified as to why the SEC has moved forward in this area when it already has two functioning regimes that are better tailored to the individual markets that are going to be covered.

I think the SEC’s proposal in this set of, in this Rule, really is not fit for the fixed income markets, not specifically tailored for them. And we are concerned that our broker-dealers will have to look at these proposals and, you know, risk as you mentioned at the beginning, multiple responsibilities, or perhaps even conflicting interpretations of the same responsibilities across the different regulatory bodies. So again, we think Rule 605 – update to gather information, perhaps hold roundtables to assess appropriate tick sizes. The order competition rule is not something, its billed is something that will benefit us, but I don’t know that we’ll actually have access to it. And the best execution rule is layering on additional regime which we don’t see the need for and we think the SEC should take a step back from.

Ken Bentsen: Ellen, I want to just talk with respect to the order competition rule. It’s designed to some extent, I think, on the options market. You obviously have a lot of experience in the options market besides the equity markets. But there’s some key differences, right, between how the options auction market works. And that really creates some risk here. Maybe you could go into that – where the retail investor under this proposed regime could really be exposed in a failed auction environment.

Ellen Greene: Sure, the retail auctions that investors use in the options market are quite effective because when the order is sent into the market, it’s paired at a specific price, meaning that when the order arrives at the exchange, the investor is guaranteed a fill.

Additionally, the price that the investor receives on the execution will be no worse than the price specified on the paired order.

Once the order arrives at the exchange, market participants have the ability to respond and price improve the order to the benefit of the end investor.

Auctions work well in options but it’s important to recognize that the structure works because there are three fundamental differences between the equity and options market structure:

  1. First, there are 10k equity securities vs. 1.5 million strike listings;
  2. Second, the options market is quote driven while equities are order driven; and
  3. Third, a fundamental difference, all listed options trades occur on one of the 16 options exchanges because there is no trade reporting facility (or TRF) in options.

When we contrast options market structure to the proposed equity order competition rule which would require auctions for retail or the newly defined segmented orders, we remain concerned that when an order is sent to an auction on an open competition venue, or an exchange, there is no guarantee that the order will receive an execution.

This is critically important because today’s market structure ensures that retail investors receive an execution due to the obligations between the introducing retail broker and the wholesaler, from whom the order is routed to.

The order handling rules ensure a fill, which is almost always at a price superior to the national best bid and offer.

Under the Order Competition proposal, there are no such guarantees, and in fact, rather than an instantaneous execution, an order is required to participate in an auction that will last from 100 to 300 milliseconds, which in equity trading, is a significant amount of time.

The second concern is that since these orders aren’t paired as they are in the options market, they could remain unfilled, especially if multiple orders are submitted at the same time.

Since there hasn’t been a lot of clarity as to how these auctions would operate, there are many unanswered questions about whether the auctions would result in additional price savings and truly benefit retail investors.

Ken Bentsen: In closing, where do we see the impetus for these proposals? Obviously, 605 has been out there. There was a previous SEC rule dealing with odd lots and round lots as far as the NBBO. But what do we see driving this? Has Congress come forth and directed the SEC to do this? What is the problem that the SEC is seeking to solve, particularly when even as SIFMA over the years has developed white papers, we also have, as we’ve engaged with the SEC and all market participants, recognized the fact that investors are paying the lowest amount, in some cases, no amount for trade costs. They’re getting better execution than they’ve ever gotten before. The cost of investing has never been lower. What is it that we, why do we think the SEC is trying to do this and where are the risks?

Ellen Greene: You know, it’s a really great question because as we look at our markets and we’ve discussed today, the markets work very well for both retail and institutional investors.

The SEC hasn’t identified any market failures. Congress has not directed the SEC to institute new rulemaking for the equity markets. So, we really question where the impetus and the direction for these major changes comes from.

And the risk here is that today, as we’ve said, retail has never had it better. Institutional investors have excellent execution quality. However, what these proposals could potentially do, especially when you put them in all at the same time – finer tick increments, auctions, a new best execution rule – we really question what all of this would, what would occur if all of this were put in the market together and we think that really this would have a very negative impact on investors and how the markets operating.

We do think that it’s important to understand market quality, start with an evaluation, Rule 605, understand execution quality, and then from there using the data to make measured recommendations similar to what SIFMA has previously done, but in order to make sure that the markets are going to be improved and the new rules will support that as opposed to potentially putting in place a new structure that could harm investors.

Leslie Norwood: I have a thought to add before we finish. I think it’s important to note that should the SEC decide to proceed with this, SIFMA and its members strongly feel that the implementation period needs to be extremely lengthy and we’re talking multiple years.

This is because the proposal potentially requires broker dealers to build systems and linkages that would go well beyond their current practices, in fixed income in particular. And these types of additional linkages as well as developing systems, policies, procedures, and supervision would take a significant amount of time to code and implement. And so that’s one consideration that is very important and will be pushed by our membership.

Ken Bentsen: Thanks. Chris, Bill, any closing thoughts?

Bill Thum: I would just say, you know, we again, we appreciate the motivation behind the SEC’s proposals here. You know, we are concerned though, you know, our retail investors may not see the benefit. So, gathering information, holding roundtables on tick sizes, those are the areas that we think should be focused on. The other proposals really present big concerns to our members and the best execution proposal is highly redundant and seemingly unjustified.

Ken Bentsen: Well, Bill, Chris, Leslie, and Ellen, thank you all very much for spending time with me today. And thank you to all our listeners. And for more information on this, please go to our website at

Thank you all.

Kenneth E. Bentsen, Jr. is President and CEO of SIFMA. Mr. Bentsen is also Chair of the International Council of Securities Associations (ICSA), Co-Chair of the British American Finance Alliance (BAFA) and Chairman of Engage China.

Ellen Greene is Managing Director, Equity and Options Market Structure

Chris Killian is Managing Director, Securitization and Corporate Credit

Leslie Norwood is Managing Director and Associate General Counsel, Municipal Securities

Bill Thum is Managing Director and Associate General Counsel in SIFMA’s Asset Management Group