- New Rules
- The Case Against the Proposal
- The Investment Company Institute’s Perspective
- Other Pros and Cons
New Rules
Late last year, the Securities and Exchange Commission proposed four rules that focus on increasing competition for equity orders. One would require open auctions for certain orders. Another, Regulation Best Execution, would set a standard for broker-dealers and other market participants, and require policies and procedures on finding the most favorable price points for customers.
The proposals stem in part from concerns about payment for order flow, a process in which brokerages sell customer orders to market makers that offer the highest prices. These transactions came into question during the trading frenzy surrounding GameStop and other meme stocks in early 2021.
The Case Against the Proposal
Financial industry trade associations generally said they agreed with the SEC’s effort to increase transparency and competition for orders, but they opposed the agency’s approach, because they consider that the SEC is trying to do too much and too fast for no apparent reason.
SEC proposals designed to help investors get better prices for their stock trades are getting strong pushback from financial industry groups also because they argue that these measures would increase costs for investors and conflict with rules in place that are already working.
According to Securities Industry and Financial Markets Association CEO Kenneth Bentsen Jr., the SEC could not identify a market failure that would justify the dramatic structural changes proposed, yet the proposals, individually and together, would result in fundamental changes with uncertain and consequential results. SIFMA commissioned a study included with comments by financial professionals demonstrating that the cumulative effects of the proposals likely overstate the purported benefits and likely understate the costs of its proposals.
The Investment Company Institute’s Perspective
The Investment Company Institute, which represents the mutual fund sector, told the SEC to slow down.
ICI CEO Eric Pan thinks that the SEC has issued a large number of proposals that will lead to far-reaching and interconnected changes to the equity and fixed income markets. They total more than four thousand pages, and none should be considered in isolation.
ICI urges the Commission to take a considered approach and thoughtful pace regarding its market structure proposals.
Other Pros and Cons
Proponents of the payment for order flow say that it allows commission-free trading. But SEC Chairman Gary Gensler has questioned whether investors are consistently getting the best deal possible.
In its comment letter, SIFMA said the SEC hasn’t justified why Regulation Best Execution is necessary.
According to Ellen Greene, SIFMA managing director of equity and options market structure, SIFMA believes the existing rules work very well to support best execution for current market conditions. The Commission has not articulated a single quantifiable benefit that would result from the adoption of Regulation Best Execution or that would justify the significant costs and burdens to broker-dealers and, in turn, investors.
ICI warned that Regulation Best Execution would hinder financial advisors’ ability to get the best trading prices for their customers in discretionary accounts.
ICI deputy general counsel Sarah Bessin and assistant general counsel Kevin Ercoline wrote in a comment letter that having advisory accounts subject to the enhanced due diligence measures for ‘conflicted transactions’ and the competitive auction function would result in worse average executed prices for those advisory accounts as advisors would no longer be able to aggregate orders and utilize economies of scale.
According to American Securities Association CEO Christopher Iacovella, Regulation Best Execution would upend a retail broker-dealer’s business model, which currently maximizes efficiency and returns. Thus, prescriptive requirements can ultimately cost the customer more money, and American Securities Association cautions the SEC from pushing firms into untenable situations when current best execution requirements are working well for markets and customers.
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