WATS Equities Oferecemos produtos inovadores, combinados com visão de mercado e atendimento ao cliente, o que se traduz em estratégias de negociação eficientes. Nosso conjunto completo de ferramentas state-of-the-art suportam a execução eficaz e são personalizados para atender aos seus objetivos comerciais. Nossa equipe de comerciantes experientes estratégias de design que respondem em tempo real às condições de mercado em mutação, fornecendo: Acesso a todos os centros de mercado NMS, incluindo locais escuros e iluminados através do nosso roteador inteligente proprietária Análise de índice quantitativa aprofundada negociação algorítmica totalmente personalizável recursos WATS Equities : Agencia, evento-driven e negociação de pares Negociação de transição e capacidades de otimização de cesta com nossos algoritmos para a liquidação de carteira eficiente Totalmente automatizado e personalizável pares e módulo de negociação propagação que pode aceitar qualquer fórmula para vários títulos WATS Trade Color, uma transparência total em tempo real Trade analytics portal que fornece inteligência de mercado e de portfólio para ajudar a conduzir decisões de negociação Conjunto diversificado de algoritmos Nosso conjunto dinâmico de algoritmos cobre o espectro de participação no mercado, do furtivo ao agressivo, usando: Previsões sofisticadas de preço e volume de curto prazo para melhorar a execução A liquidez oculta através do acesso a vários pools escuros cuidadosamente selecionados Apoiar transações de ações individuais ou negociação baseada em carteiras Saiba mais sobre algoritmos WATS Equities Saiba mais sobre algoritmos WATSEuropean Dark Pools Expandir, Spiting Reguladores Ambições Stock trading cresceu mais rápido em piscinas escuras européias no ano passado do que em Público, sinalizando que uma campanha de regulamentação para reprimir a prática está lutando para mudar o comportamento. As regiões de piscinas escuras - locais que não exibem os preços antes das negociações acontecerem - tiveram um salto de 45% no valor da negociação que manuseavam em 2015, de acordo com o corretor e operador de mercado de ações Investment Technology Group. Aumento percentual. Os espaços escuros estão a expandir-se mais rapidamente do que os seus homólogos iluminados, embora a União Europeia esteja a planear impor restrições rigorosas sobre eles. As instituições da UE estão preocupadas com o facto de os mercados públicos se tornarem menos eficientes e os preços das acções serem menos precisos se os bancos escuros captarem uma parte considerável das transacções de acções. Ao mesmo tempo, os reguladores dos EUA multaram vários locais escuros, incluindo o ITG, por quebrar as regras. É uma continuação de uma tendência que weve visto desde que estas plataformas lançaram, disse Rob Boardman, diretor executivo do braço europeu de ITGs. O buy-side encontra um valor significativo na liquidez escura, e esperamos que essa demanda continue. Os dados de ITGs não incluem pools funcionais do banco conhecidos como as redes do cruzamento do corretor, que combinam comércios entre os clientes dos bancos. Os regulamentos da UE acabarão por exigir que os bancos eliminem gradualmente esses pools ou os convertam em plataformas regulamentadas. Dark Trading A atividade de captura de dados nos locais de ações europeus chamados de multilaterais, ou MTFs. As negociações sombrias em MTFs aumentaram para 6,6% do mercado de ações europeu em 2015, contra 5,7% em 2014, de acordo com dados da Fidessa Group Plc. A UE introduzirá um limite no volume de transacções fora de bolsa em qualquer acção individual no âmbito de um pacote de novos regulamentos, denominado MiFID II. Cada piscina escura só será capaz de lidar com 4 por cento do comércio global em uma segurança individual. A negociação total na bolsa será restrita a 8% do volume por ação. Quebrando as tampas levará a negociação sendo suspenso. Cinco anos atrás, os pools escuros representavam apenas 2,7% do comércio europeu, de acordo com dados da Bats Chi-X Europe, que administra o maior mercado de ações pan-europeu. Esse número subiu para 7,5% em dezembro. Como a sua quota de negociação aumentou, escrutínio sobre piscinas escuras também aumentou. A Bloomberg News informou em setembro que o Credit Suisse Group AG pagará mais de 80 milhões para resolver alegações nos EUA de que não informou adequadamente os clientes sobre como sua piscina escura da Crossfinder operava. Em agosto, a ITG disse que pagaria 20,3 milhões depois que os reguladores norte-americanos descobriram que ele negociava contra seus clientes sem jamais divulgar o conflito. Crucialmente, as regras europeias recebidas isentam os comércios considerados grandes em escala. As restrições estão programadas para começar no início do próximo ano, embora eles são amplamente esperados para ser adiada até 2018. Não é surpreendente que não tenha havido uma diminuição no comércio escuro, disse Anish Puaar, mercado europeu analista da Rosenblatt Securities Inc. Ninguém vai mudar agora por uma regra que provavelmente não vem até 2018. Bolsas de valores, do London Stock Exchange Group Plc para a Deutsche Boerse AG, desenvolveram ordens destinadas a atrair negócios de bloco para seus mercados. Bats Chi-X Europe introduziu um livro de pedidos em outubro que prioriza o tamanho sobre a velocidade. Antes do seu aqui, seu no Terminal de Bloomberg. LEARN MOREPublic Statement Estrutura do mercado de capitais norte-americanos: tornar nossos mercados melhores para os investidores I. Introdução É sabido que a Comissão precisa realizar uma revisão holística de nossa atual estrutura de mercado de ações. Com efeito, a Comissão criou um comité consultivo para assistir a essa revisão.2 Para prosseguir este processo, pretende-se concentrar-se em certas questões que qualquer revisão séria deve considerar como as várias questões que surgiram a partir de uma estrutura cada vez mais fragmentada dos nossos mercados , Incluindo a qualidade do mercado, e várias respostas dos participantes do mercado à concorrência intensificada pelo fluxo de pedidos. Nas áreas em que parece haver uma necessidade imperiosa de acção e onde os benefícios de uma determinada linha de acção são claros, há um apelo à acção. Em áreas onde pode haver uma necessidade de ação, mas onde o melhor curso não é prontamente aparente, serão feitas recomendações sobre áreas que precisam de mais estudos, incluindo pesquisas empíricas. Finalmente, em áreas onde não há evidência convincente de que a mudança é justificada, ou onde pode parecer que as reformas sugeridas podem até mesmo piorar as questões, será preciso cautela.3 II. Contexto Os mercados acionários dos Estados Unidos apresentam um paradoxo. Nossos mercados são rotineiramente elogiados como sendo os mais líquidos, transparentes, eficientes e competitivos. No mundo.4 E, por muitas medidas de qualidade de mercado, isso parece ser verdade. Os spreads cotados bid-ask para os maiores estoques permanecem atrelados ao nível mínimo de um centavo 5 e os spreads globais, incluindo os de ações menores, estão próximos de baixos históricos.6 A profundidade de mercado mostrada para a ação média tem, de acordo com um estudo, Cresceram quase 300 nos últimos oito anos, 7 volumes de negociação diários médios voltaram aos níveis de crise pré-financeira 8 e a volatilidade intraday está perto de seus níveis mais baixos em décadas.9 A concorrência tem beneficiado diretamente os investidores de varejo de várias maneiras, Tornando os preços geralmente mais eficientes10 e elevando as taxas de comissão a níveis historicamente baixos.11 Os investidores institucionais também parecem estar se saindo bem. Um estudo estima que os custos médios para as transações comerciais em bloco caíram em aproximadamente 66 desde 2001.12 Outro estudo mostra que os custos institucionais de negociação para as ações de grande capitalização dos EUA estão entre os mais baixos do mundo e que esses custos caíram mais de 19 apenas desde 2010. 13 E, embora os estoques de pequena capitalização continuem a enfrentar sérios desafios 14, há algumas boas notícias aqui também: a profundidade de mercado exibida para esses títulos quase dobrou nos últimos dez anos.15 Em conjunto, esses números retratam um mercado de ações vibrante Que está funcionando bem para muitos participantes do mercado. Ao mesmo tempo, nossos mercados de ações nunca foram objeto de críticas mais estridentes e difundidas. Nossos mercados têm sido descritos como quebrados, 16 uma bagunça completa, 17 ou, talvez o mais alarmante de todos, manipulados.18 O que é especialmente preocupante com essas críticas é que elas não vêm de pessoas não-informadas, mas de participantes sofisticados da indústria. Por exemplo, Thomas Peterffy, um dos pioneiros do comércio eletrônico19, disse que nossos mercados estão em uma crise, e que a ordem, o comércio justo e a confiança precisam ser restaurados.20 Charles Schwab, fundador da corretora eponimática, caracterizou De alta freqüência como um câncer crescente que está corrompendo nosso sistema de mercado de capitais, criando um campo de jogo sic sem igual para investidores individuais e dirigindo os incentivos errados para nossas bolsas de commodities e ações.21 Até mesmo um ex-CEO da Bolsa de Valores de Nova York observou Que ninguém racional olharia para este mercado e diria que não está quebrado.22 Essas opiniões não podem ser simplesmente descartadas como as queixas de veteranos da indústria que se viram no lado errado das mudanças transformacionais que nossos mercados têm testemunhado nos últimos anos: uma pesquisa recente Descobriu que a maioria dos participantes da indústria financeira acredita que os mercados não são justos para todos os participantes.23 Um aspecto abrangente da nossa estrutura de mercado que tem sido alvo de críticas por muitos participantes no mercado é a sua natureza altamente descentralizada. Especificamente, muitos participantes do mercado alegaram que, embora a regulamentação NMS tenha aumentado a concorrência, também fomentou uma estrutura de mercado excessivamente fragmentada que aumenta os custos de transacção24 e torna os nossos mercados excessivamente frágeis.25 Existem também alegações de que a grande e crescente proporção de transacções que Tem lugar longe das trocas, quer nos chamados pools escuros26, quer através dos processos de preferência27 e internalização28, reduziu a liquidez exibida e dificultou grandemente o processo de descoberta de preços.29 Outros ainda afirmam que os incentivos como o modelo de preços do fabricante e o pagamento pelo fluxo de ordens Os acordos31 colocam conflitos de interesses irreconciliáveis para corretores que privam os investidores de seu direito à melhor execução.32 Como podemos conciliar essas narrativas concorrentes sobre o estado de nossos mercados de ações Não há respostas fáceis. Mas a intensidade do debate em curso deixa claro que está bem na hora de uma revisão objetiva e desapaixonada de nossa estrutura de mercado de ações. Esta revisão deve ser destemido e busca. Está em jogo demasiado para que a Comissão aceite apenas os pressupostos subjacentes ao estatuto e as justificações que alguns propuseram para a defender. No entanto, para que essa revisão seja baseada em princípios, ela deve ser informada. Proceder na ausência de dados fiáveis convida as decisões políticas a serem tomadas com base na autoridade da Comissão e não com base em provas, o que deixa o processo normativo vulnerável aos interesses adquiridos. Por outras palavras, sempre que a Comissão exerce os seus poderes de regulamentação, deve fazê-lo com prudência e, sempre que possível, com o benefício de informações precisas e completas. Além disso, qualquer revisão potencial da nossa estrutura de mercado deve ser prosseguida de forma cuidadosa e medida. A experiência passada mostra que mesmo pequenas mudanças podem alterar profundamente nossos mercados de ações de maneira imprevista.33 Dito isto, a Comissão não pode adiar a ação quando há uma necessidade óbvia dela. Isso prejudica de forma inaceitável a segurança dos investidores eo bom funcionamento dos nossos mercados de acções. III. Uma análise criteriosa da estrutura do mercado deve começar com uma simples realização: nenhuma estrutura de mercado é ideal para todos os participantes do mercado. Uma estrutura que é ideal para um grupo deve, pelo menos até certo ponto, deixar os outros menos favorecidos do que poderiam ser.34 Como resultado, a estrutura do mercado de hoje incorpora uma série de trade-offs que elevam certos objetivos políticos acima dos outros e Que beneficiam mais alguns participantes do que outros.35 Dado que os trade-offs são uma conseqüência inevitável de qualquer estrutura de mercado, é importante identificar os objetivos políticos que devem ser priorizados. Aqui está a hierarquia apropriada: Primeiro, não há dúvida de que os interesses devem ser primordiais: os dos investidores e dos emissores que utilizam os mercados de ações para atender aos objetivos econômicos subjacentes, em vez de lucrarem com a negociação contínua.36 Esses investidores e emissores são Razão pela qual os mercados de ações existem, 37 e seus interesses devem vir em primeiro lugar. A próxima prioridade deve ser estruturar nossos mercados de ações para maximizar os benefícios públicos que derivam de mercados altamente líquidos, que produzem os preços mais precisos.38 Mercados de capital profundos, eficientes e líquidos são o motor que impulsiona o crescimento econômico do nosso país, 39 e Nossas políticas devem favorecê-los sempre que possível. A terceira prioridade deve ser apoiar os interesses dos participantes no mercado que apóiam nossos mercados, tais como os negociantes registrados e os criadores de mercado, porque eles são parte indispensável de um mercado eficiente e líquido.40 Entretanto, os interesses desses participantes no mercado são Sujeitos a uma limitação importante: devem ser apoiados apenas na medida em que contribuam para a prossecução dos dois primeiros objectivos de política acima mencionados.41 Esta abordagem decorre da missão da Comissão, que consiste em proteger os investidores, manter mercados justos, ordenados e eficientes e Facilitar a formação de capital.42 Por fim, as políticas da Comissão devem, em geral, desfavorecer os interesses dos comerciantes que pretendem tirar proveito indevido de outros operadores.43 Por exemplo, a Comissão deve considerar o impacto dos comerciantes algorítmicos que dependem de tecnologia de ponta para explorar preços Discrepâncias que existem apenas por milissegundos. Argumentou-se que essa negociação meramente aumenta os custos de negociação para os comerciantes legítimos e, em geral, não oferece os benefícios da arbitragem.44 Mas, deve-se reconhecer que uma análise matizada é muitas vezes exigida. Conforme discutido a seguir, existem algumas atividades que podem não parecer beneficiar os investidores comuns, como o modelo de precificação do fabricante, que pode de fato fornecer alguns benefícios.45 Ao realizar uma revisão de nossa estrutura de mercado de ações, a Comissão precisa considerar Os fatores do Securities and Exchange Act que estabelecem o mandato da Comissão com relação ao sistema de mercado nacional. Especificamente, a Comissão deve orientar-se por cinco objectivos, na medida em que procura criar regras que regulem a estrutura do mercado de acções. Estes objectivos incluem: i) a execução economicamente eficiente das transacções de valores mobiliários; ii) a concorrência leal entre os corretores e negociantes, entre os mercados de câmbio e entre os mercados de câmbio e os mercados que não os mercados de câmbio; iii) a disponibilidade para os corretores, (Iv) a praticabilidade de corretores que executam ordens de investidores no melhor mercado e (v) uma oportunidade, consistente com eficiência e melhor execução, para que as ordens de investidores sejam executadas sem a participação de um revendedor. 46 Contudo, como observou a Comissão, estes objectivos podem ser, por vezes, em tensão, e é evidente que existe um desacordo razoável quanto à questão de saber se a estrutura do mercado em qualquer momento concreto está, de facto, a atingir um equilíbrio adequado destes múltiplos objectivos. 47. Na medida em que os objetivos descritos no Exchange Act entram em conflito, a Comissão deve considerar as prioridades descritas acima, bem como a missão abrangente da Comissão para proteger os investidores, manter mercados justos, ordenados e eficientes e facilitar o capital Formação.48 IV. A proliferação de locais de negociação Nossos mercados de ações testemunharam uma profunda transformação nos últimos anos. Uma estrutura que foi dominada por um punhado de trocas apenas algumas décadas atrás deu lugar a um sistema muito mais descentralizado, em que a atividade de negociação está dispersa em 11 bolsas, 49 aproximadamente 44 sistemas de negociação alternativos, 50 e mais de 200 corretores Que internalizam os seus clientes transaccionando-os contra os seus próprios inventários (internalizadores) .51 De muitas formas, esta estrutura foi fortemente influenciada por uma série de iniciativas regulamentares implementadas pela Comissão ao longo dos últimos 20 anos, num esforço para incentivar a concorrência. Na sequência destas iniciativas regulamentares, em especial da Regulamentação NMS (Reg NMS), a Comissão procurou equilibrar duas formas de concorrência vitais, mas potencialmente conflituantes: a concorrência entre os centros de mercado e a concorrência entre as encomendas individuais. 53 A Comissão tentou navegar a tensão entre estes objectivos permitindo que os centros de negociação competirem vigorosamente, ao mesmo tempo que impunha a concorrência entre as encomendas através da regra de protecção de ordens dos regulamentos NMS, também conhecida como regra de troca. A regra de proteção de ordens exige essencialmente que todos os centros de negociação54 garantam que os comércios sejam executados com os melhores preços cotados, mesmo que signifique o encaminhamento de uma ordem para um concorrente que exibe publicamente um preço superior55. Um mercado unificado, forçando-os a competir pelo fluxo de pedidos.56 Pensa-se que essa competição tenha beneficiado investidores de varejo e institucionais por meio de custos de comércio mais baixos, execuções mais rápidas e melhor qualidade de execução.57 Mas o crescente número de locais de negociação - offs, também. Em primeiro lugar, a diluição da liquidez entre múltiplos centros de negociação pode prejudicar a qualidade do mercado, em especial o processo de descoberta de preços, que é uma das funções mais críticas do mercado. Em segundo lugar, múltiplos centros de negociação podem dar origem a custos e complexidade acrescidos e tornar os nossos mercados mais suscetíveis a interrupções, técnicas ou não. Finalmente, vários centros de negociação podem levar a questões de transparência para os investidores, que podem lutar para identificar os locais para onde suas ordens foram encaminhadas, em um esforço para garantir o melhor preço. Cada uma dessas questões é discutida abaixo. uma. Qualidade do Mercado e Descoberta de Preços A proliferação de locais de negociação pode ameaçar a capacidade dos mercados de avaliar as ações com precisão de duas formas distintas. Em primeiro lugar, quando os juros de negociação se espalham por uma multiplicidade de locais iluminados, 58 os comerciantes podem achar mais difícil e dispendioso localizar liquidez e executar negócios de maneira oportuna, particularmente quando estão envolvidos maiores negócios.59 Em segundo lugar, aproximadamente 35,85 de todas as negociações são Agora executado por piscinas escuras e internalizadores.60 Como esses dois locais não exibem suas cotações para o público, uma parcela significativa dos juros do mercado está agora protegida do processo de descoberta de preços pré-negociação.61 Alguns estudos acadêmicos recentes têm Procurou examinar a possibilidade de que a qualidade do mercado possa sofrer quando a liquidez se espalhar por um número crescente de plataformas iluminadas e escuras.62 Esses estudos estão sujeitos a inúmeras limitações em termos de qualidade e disponibilidade de dados e, embora seus resultados estejam longe de Uniforme, eles geralmente sugerem que o advento de novas trocas e locais de negociação escuros pode levar a uma melhor descoberta de preços, spreads mais apertados, menores custos de transação e, possivelmente, maior profundidade exibida.63 No entanto, isso parece ser verdade apenas até certo ponto. Vários estudos descobriram que pode haver um limiar para além do qual a fragmentação adicional e o comércio no escuro podem prejudicar a descoberta de preços e a qualidade geral do mercado e que este limiar pode variar dependendo da capitalização do mercado de existências.64 Um estudo tentou mesmo estimar o limiar para além do qual Negociações negativas adicionais podem prejudicar a qualidade do mercado. Este estudo concluiu que 46,7 poderia ser o ponto de inflexão para todas as ações e, além disso, que as ações em cada nível de capitalização de mercado poderiam ter seus próprios pontos de inflexão, dependendo da plataforma de negociação em questão.65 Como observado acima, Baixos custos de transação e aumento da liquidez exibida.66 Isso sugere que a proliferação de trocas iluminadas e escuros locais de negociação nos últimos anos não prejudicou os investidores, pelo menos não em qualquer grau mensurável. Além disso, embora possa vir um ponto em que os locais escuros capturam muito fluxo de pedidos, as evidências atualmente disponíveis para nós sugerem que ainda não cruzamos esse limite.67 No entanto, essa é uma questão que merece atenção. A literatura acadêmica identifica riscos muito reais e agudos que podem surgir se a atividade de negociação continuar sendo dispersa em uma crescente rede de centros de negociação. Tal exige que a Comissão acompanhe atentamente os níveis de negociação negativa nos nossos mercados e as suas potenciais consequências para a qualidade do mercado. Esta vigilância deve ser suficientemente granular para avaliar os efeitos da transacção em bolsa sobre stocks com diferentes níveis de capitalização de mercado e em diferentes locais, uma vez que estudos sugerem que podem ser aplicados limiares diferentes a cada um.68 Este controlo é essencial para que a Comissão não seja tomada Por surpresa, precisamos neutralizar os problemas antes que eles ocorram, não reagir a eles. Além disso, embora as métricas de qualidade de mercado acima descritas sugeram que os mercados funcionam bem, a Comissão não pode tornar-se complacente. Há sempre espaço para melhorias. A Comissão deve procurar proactivamente formas de tornar os nossos mercados ainda mais funcionais para os investidores. Para o efeito, a Comissão deverá ponderar uma série de medidas para fazer face à tendência de um aumento do comércio negro. Em primeiro lugar, embora a Comissão tenha dado o passo importante de pedir aos centros de negociação que clarifiquem a forma como funcionam os seus numerosos tipos de encomendas 69, a Comissão deveria também estudar a forma como a utilização de tipos de encomendas não expostos pelas bolsas pode afectar o processo de descoberta de preços. Estes chamados tipos de ordem oculta representam outra forma de liquidez escura que não é frequentemente discutida. Um estudo descobriu que os tipos de ordem não exibidos são os tipos de ordens mais comumente usados em trocas, 70 e esses tipos de ordem podem representar até 11 a 14 do volume baseado em câmbio.71 A Comissão deve estudar o efeito desse fenômeno Ter no processo de descoberta de preços e incentivos para que os investidores exibam ordens limitadas exibidas. Em segundo lugar, a Comissão deveria explorar formas de expor as trocas comerciais fora da bolsa a uma maior concorrência. Uma possibilidade é exigir que negociações negociadas em pools escuros e com internalizadores sejam expostas às trocas para uma potencial melhoria de preços.72 Isso basicamente criaria um processo de leilão que beneficiaria diretamente os investidores e poderia potencialmente aumentar a liquidez exibida. Em terceiro lugar, a Comissão deveria eliminar a proposta de Regulamento de Intercâmbio de Interesses Não Públicos emitida em 200973 e examinar se a descoberta de preços poderia também ser reforçada através da adopção das disposições propostas nesse lançamento. Estas disposições incluem: (i) exigir que os ATS mostrem publicamente indicações de interesse de menor dimensão, 74 (ii) reduzindo o limite de 5 volumes para que os ATS mostrem publicamente as suas encomendas com melhor preço, e (iii) exigir que os ATS divulguem os seus Identidades quando eles relatam operações executadas para a fita consolidada, com uma exceção ou atraso apropriado para os negócios em bloco.76 Essas ações já foram objeto de aviso público e comentários, ea Comissão poderia proceder à adoção imediatamente, sujeito às melhorias que puderem Os comentários e os dados recebidos. B. Complexidade e Fragilidade Observou-se que, para cumprir a regra de protecção de ordens do Reg NMS, 77 locais de negociação e corretores de bolsa desenvolveram sistemas de TI elaborados para monitorizar os preços de todas as existências de NMS78 em todas as bolsas iluminadas e encaminhar encomendas de acordo .79 Essas entidades afirmam que esse emaranhado de conexões de dados acrescenta complexidade e custo desnecessários, 80 e torna nossos mercados excessivamente frágeis.81 Eles também afirmam que a regra de proteção de pedidos apóia trocas que, de outra forma, não são economicamente viáveis, dando-lhes uma quota de mercado Além disso, pelo menos um participante no mercado alegou que a obrigação de interagir com as bolsas de menor dimensão expõe os corretores-agenciadores aos fluxos de encomendas tóxicas de uma forma que os leva a violar as suas melhores obrigações de execução.83 Diversas bolsas de valores, Os concessionários solicitaram, por conseguinte, à Comissão que revogasse a regra de protecção de encomendas para limitar o seu alcance a trocas que satisfaçam um certo limiar de quota de mercado, como 1 por cento.84 A regra de protecção da ordem revelou-se uma protecção vital para o investidor e não deve Ser enfraquecido levemente. De facto, a importância continuada da regra de protecção da ordem foi sublinhada pelas recentes medidas de execução. Por exemplo, a Autoridade Reguladora do Setor Financeiro (FINRA) multou um operador de pool escuro no ano passado por violações da regra 85, e há apenas dois anos, três bolsas admitiram não terem obtido o melhor preço disponível para seus clientes.86 Além disso, Parece que apenas duas bolsas, a Bolsa de Valores de Chicago e a Bolsa de Valores de Nova York, estão atualmente abaixo do limite de 1% sugerido.87 Assim, parece que as economias de custos decorrentes da exclusão dessas duas bolsas da regra de proteção de ordens seriam provavelmente insignificantes. Além disso, com a entrada em vigor do próximo ano, as preocupações com a fragilidade do mercado devem diminuir. Mais importante ainda, o limite sugerido de 1 por cento poderia sufocar inutilmente a competição e a inovação. A regra de proteção de pedidos parece ter incentivado a inovação ao ajudar as novas bolsas a superar barreiras significativas à entrada. Por exemplo, para lidar com o problema do encolhimento de pedidos, 89 a Nasdaqs PSX Exchange implementou uma nova abordagem de substituição do tradicional esquema de prioridade preço-tempo por um esquema de prioridade de preço.90 Da mesma forma, o IEX desenvolveu inovações que podem ajudar a atrair mais Liquidez a locais iluminados e que podem anular as vantagens de velocidade de que beneficiam os operadores de alta frequência.91 A resposta inicial a estas inovações parece ser positiva. A Nasdaq, que tinha uma participação de mercado de apenas meio por cento há apenas um ano, alcançou agora uma quota de mercado total de 1 por cento.92 Da mesma forma, o IEX, que teria apenas metade de um por cento de sua participação no mercado há apenas um ano, Ter aproximadamente 1,134 do mercado 94 e está tentando registrar-se como uma troca.95 Além disso, a alegação de que a regra de proteção de ordens sustenta trocas não rentáveis parece ser minada por eventos recentes. Por exemplo, no ano passado, a Bolsa Nacional de Valores e as bolsas de valores da CBOE que não conseguiram atingir 1% da participação no mercado foram ambas fechadas.96 Aparentemente, a regra de proteção da ordem não as sustentava. No entanto, se as forças do mercado não conseguirem resolver a situação de uma bolsa de valores que não atingiu uma quota de mercado razoável durante um período prolongado, os participantes do mercado têm outros meios através dos quais podem procurar alívio. Especificamente, se os participantes no mercado puderem demonstrar que a ligação a uma pequena bolsa representa custos desnecessários e torna o sistema do mercado nacional mensurávelmente menos estável, os participantes no mercado podem solicitar à Comissão uma isenção limitada da regra de protecção da ordem, É de interesse público.97 c. Transparência Finalmente, o crescimento das plataformas de negociação criou questões de transparência, uma vez que os investidores geralmente não sabem qual das multidões de bolsas, ATSs e internalizadores que suas ordens são encaminhadas, em um esforço para obter o melhor preço. Capacidade dos investidores institucionais para monitorar a qualidade de suas execuções comerciais. Evidências anedóticas sugerem que esta não é uma preocupação ociosa. Um estudo realizado por uma empresa de buy-side descobriu que uma pequena ordem de compra de apenas 1.000 ações foi enviada para 18 bolsas diferentes e piscinas escuras antes que ela estivesse inteiramente preenchida. Outra empresa ficou chocada ao saber que sua ordem de compra de 2,5 milhões de ações de um O estoque altamente líquido levou seu corretor a colocar e cancelar lances para um total de 750 milhões de ações em vários locais, tudo em um esforço para ocultar a ordem de comerciantes de alta freqüência.100 Para resolver essas questões, existe um consenso geral de que os investidores precisam Melhores informações sobre a qualidade da execução de ordens e práticas de roteamento.101 As informações que os investidores recebem de acordo com as Regras 605 e 606 do Regulamento NMS são projetadas para apoiar a concorrência, aumentando a transparência da execução de ordens e práticas de roteamento.102 No entanto, Avanços e estão em necessidade de modernização. Apenas no Verão passado, o Presidente White pediu ao pessoal que preparasse uma recomendação para a Comissão sobre esta questão 103, e estas alterações devem ser prosseguidas o mais rapidamente possível. As atualizações necessárias são muito numerosas e detalhadas para listar aqui, mas as principais mudanças incluem o seguinte: (i) adicionar novos tipos de ordem ao requisito de divulgação, incluindo ordens de reserva e (ii) capturar todo o ciclo de vida de uma ordem, como Todos os roteadores e locais através dos quais uma ordem passa antes da execução, incluindo todos os roteadores e locais pertencentes à mesma entidade (iii) recalibrando os parâmetros para medir a velocidade de execução (iv) adicionando ordens de lote ímpar (v) incluindo informações para o mercado Aberto (vi) incluindo estatísticas sobre o tempo médio de cancelamento de pedidos, bem como o número total de cancelamentos para ordens de varredura intermercados, ordens de cancelamento imediato e indicações de interesse e (vii) inclusão dos mercados de opções. 104 Outras revisões importantes que são necessárias para essas divulgações são discutidas noutra parte desta declaração. V. Concorrência pelo Fluxo de Ordens Como mencionado acima, um dos principais objetivos do Reg NMS era fomentar a concorrência entre os locais de negociação.105 Uma conseqüência dessa competição intensificada é que os centros de negociação desenvolveram várias estratégias para atrair fluxo de pedidos. Por exemplo, os intercâmbios adotaram amplamente o chamado modelo de preço do fabricante-comprador (maker-taker), no qual eles impõem uma taxa aos comerciantes que removem ou retiram liquidez do câmbio atravessando o spread as bolsas usam então uma porção Dessa taxa para pagar um desconto aos comerciantes que fornecem liquidez.106 Da mesma forma, os internalizadores atraem fluxo de pedidos ao comprar as ordens que os corretores de varejo recebem de seus clientes, uma prática conhecida como pagamento pelo fluxo de ordens.107 A competição feroz entre os centros de negociação pelo fluxo de pedidos Também se manifestou de outras maneiras, como por exemplo, através do desenvolvimento de tipos de ordem exóticos que atendem a certas estratégias de negociação, particularmente aquelas usadas pelos comerciantes de alta freqüência.108 Os críticos argumentaram que a concorrência pelo fluxo de ordens introduziu conflitos de interesse que Dão aos corretores um forte incentivo para encaminhar as ordens dos clientes de forma a colocar os interesses financeiros dos corretores à frente daqueles de seus clientes.109 Os defensores, em contrapartida, argumentaram que os pagamentos pelo fluxo de ordens mantêm as comissões dos clientes de varejo baixas e que as ordens dos clientes de varejo recebem melhor execução than if they were routed directly to an exchange.110 Although there are often many sides to any discussion, the Commissions role is to subject the parties competing claims to an objective and rigorous review. uma. The Maker-Taker Payment Model No issue in the market structure debate has proven more polarizing than the maker-taker pricing modelwith the possible exception of high frequency trading. Critics decry the maker-taker model for engendering all manner of evils. For example, some claim that it has distorted order routing decisions, aggravated agency problems among brokers and their clients, unleveled the playing field among dealers and exchange trading systems, produced fraudulent trades, and produced quoted spreads that do not represent actual trading costs.111 Critics of the maker-taker model include Jeffrey Sprecher, Chairman and CEO of the Intercontinental Exchange (ICE) and the Chairman of the NYSE, who has said that the maker-taker pricing model should not be legal because it puts wrong incentives in the market.112 Sprechers critique carries significant weight because it subverts his companys own financial interestsin fact, it has been reported that fully 6 of ICEs revenues come from maker-taker fees.113 Moreover, even one of the individuals responsible for developing the maker-taker pricing model has suggested that it is no longer relevant in todays highly automated markets.114 Defenders of the model,115 however, contend that the maker-taker pricing model facilitates competition,116 provides advantages to both sides of a trade, and has helped reduce the frictional costs of trading to their lowest levels in history.117 Their argument is that maker-taker fees encourage liquidity on exchanges and narrow bid-ask spreads by compensating liquidity providers for the risks associated with posting limit orders, including the risk of adverse selection.118 What follows is a brief summation of the competing viewpoints on the key issues, followed by suggestions for a path forward. Eu. Liquidity Some commenters believe that the high access fees exchanges must charge in order to pay maker-taker rebates have diverted marketable orders119 away from the exchanges, reducing market quality and impairing the price discovery process. Specifically, these commenters have observed that, when possible, brokers will either internalize their customers marketable orders or sell them to over-the-counter (OTC) market makers, in order to avoid paying the access fees that exchanges must charge in order to pay the maker-taker rebates.120 These same commenters have further observed that many brokers will first route marketable limit orders to dark pools, which charge lower transaction fees.121 Yet, recent events appear to have confirmed the critical role that the maker-taker model plays in attracting liquidity to exchanges. On February 2, 2015, Nasdaq instituted a pilot program in which it reduced access fees and rebates for 14 highly liquid stocks, including both NYSE - and Nasdaq-listed stocks.122 The stated purpose of this program was to attract more investor orders to the public markets by responding to claims that public markets are too expensive.123 Nevertheless, the program does not appear to have achieved the intended result. Instead, it has been reported that this program has led Nasdaq to lose substantial market share, with no measurable improvement in market quality.124 Clearly, any proposed modifications to the maker-taker pricing model will require careful thought. Ii. Conflicts of Interest One study (the Battalio Study) appears to confirm that the maker-taker model has led some brokers to place their financial interests ahead of their clients interests. The Battalio Study found that four well-known national brokerages almost consistently routed their non-retail clients standing limit orders to the exchanges that paid the highest maker-taker rebate.125 The study concluded that this practice is inconsistent with maximizing limit order execution quality because limit orders sent to exchanges with lower maker-taker fees were executed faster and more frequently.126 The Battalio Study, however, was apparently based exclusively on data from a major investment bank, and thus did not directly examine orders placed by retail investors.127 The President and CEO of one of the brokers cited in the Battalio Study has said that the institutional, proprietary algorithmic trading that formed the basis of the Battalio Study is very different from retail orders.128 The President and CEO also said his firm did its own analysis of the non-marketable limit orders placed by its retail investors.129 Specifically, this analysis examined the non-marketable limit orders that were routed to the exchange that paid the highest rebates. According to the President and CEO, this analysis showed that approximately 93 of retail customers non-marketable limit orders were executed. provided there was a trade on any exchange at the limit price.130 This suggests that the conflicts of interest identified by the Battalio Study may not arise in connection with retail investors orders. Iii. Spreads Commenters have also argued that the maker-taker pricing model appears to have distorted markets by artificially narrowing quoted spreads.131 This distortion appears to occur because the quoted spreads do not reflect the fees paid by takers of liquidity or the rebates received by providers of liquidity. Thus, if the quoted spread on a stock is one cent, the true spread, assuming the take fee is 0.3 cents (the maximum permitted under Rule 610), is 1.6 cents, or 60 higher than the quoted spread.132 In the absence of the maker-taker pricing model, then, quoted spreads on some stocks would likely rise to reflect the true degree of risk traders incur when they post liquidity.133 To date, it does not appear that any empirical study of this issue has been conducted. Nasdaqs pilot program, however, suggests that the maker-taker pricing models impact on spreads could be minimal, at least with respect to certain stocks. Initial results from Nasdaqs pilot program suggest that spreads on the affected stocks have generally remained unchanged.134 The apparent absence of an effect on spreads, however, must be viewed with caution. Only highly liquid stocks were selected for the Nasdaq pilot program, and it is possible that the competitive environment for these stocks, combined with the continued availability of rebates on other exchanges, kept spreads tight despite the reduction in access fees. Iv. Other Factors to Consider Certain additional factors complicate the analysis of the maker-taker model. First, what has gone largely unnoticed in the broader debate is that the maker-taker model may represent an implicit subsidy for retail investors. According to various observers, the reason for this is that virtually none of the marketable orders placed by retail investors ever reach an exchange instead, these orders are internalized by their broker or sold to an OTC market maker that executes the orders against its own inventory.135 Internalizers and OTC market makers typically execute these marketable retail customer orders at the spread quoted on the exchange, not the true spread.136 Under the current maker-taker regime, therefore, it appears that retail investors are generally not required to pay the access fee that exchanges charge. If the maker-taker model were abolished, however, quoted spreads on at least some stocks could widen to accurately reflect the risks undertaken by liquidity providers, which could potentially harm retail investors.137 In addition, one possible explanation for the proliferation of exchanges in recent years is that it has allowed exchanges to offer different maker-taker pricing schemes.138 For example, NYSE and Nasdaq each operate three separate equities exchanges, while BATS operates four.139 Each of these exchanges offers unique fee and rebate schedules.140 Consequently, reducing or eliminating the maker-taker pricing model could potentially affect the prevailing dynamic, either by mitigating incentives to create new exchanges, or by alleviating some of the competitive pressures that have encouraged the proliferation of trading centers in our equities markets. v. A Path Forward Concerns about the maker-taker pricing model have led some to call for the Commission to ban it altogether.141 The factors listed above, however, argue for a careful and nuanced approach to this issue, one that takes into account the possibility of unintended consequences, and one that is firmly rooted in an evidence-based review. And while the three principal exchange groups have all proposed eliminating or reducing maker-taker rebates,142 Nasdaqs recent experience may suggest that the maker-taker model presents a prisoners dilemma,143 where each exchanges decision to act in its own best interests leads to an outcome that leaves all exchanges worse off than if they had cooperated.144 Such situations could be resolved through appropriate regulatory action. One option for the Commission to consider, as recommended by certain market participants and as proposed in a recent House bill,145 is a carefully constructed pilot program.146 This pilot program should apply a tiered approach, as was suggested by BATS earlier this year.147 Under this approach, maker-taker fees could be eliminated entirely for the most liquid stocks, as public trading in these stocks appears to be sufficiently robust that rebates are not required to attract liquidity to exchanges. And, as the results of the Nasdaq pilot appear to confirm, rebates do not seem necessary in order to maintain spreads on these stocks at their current levels. The proposed pilots impact on retail investors whose orders are internalized should therefore be muted. The rebates could remain in place for less liquid securities, and could be tiered so that they rise as a given stocks liquidity falls. The reductions in the rebates should be accompanied by a reduction in the access fee cap imposed by Rule 610 of Regulation NMS.148 The reduction of the cap should help ease the intense competitive pressures exchanges face in todays markets. Nasdaqs experience earlier this year might suggest that any maker-taker pilot program should include a trade-at rule. A trade-at rule would presumably help prevent liquidity from migrating away from exchanges by forcing brokers and dark pools to route trades to public exchanges, unless they can execute the trades at a price that is meaningfully better than the ones available on an exchange.149 But heres the rub: this presumption may not prove correct. According to preliminary data, Nasdaq did not lose market share to dark pools. Instead, it lost market share to other exchanges that were still paying full rebates.150 This suggests that the liquidity providers who fled Nasdaq were those who place a substantial premium on receiving maker-taker rebates.151 Therefore, if all exchanges are forced to eliminate or reduce rebates, it does not necessarily follow that liquidity providers will migrate to dark venues.152 But since such a migration is at least a possibility, the pilot program proposed above should take this into account. Given the uncertainty as to the potential impact of eliminating or reducing maker-taker fees, the proposed pilot program should have two phases. The first phase would eliminate or reduce rebates, with a corresponding reduction of the access fee cap. At that stage, the pilot would not include a trade-at requirement. At the end of the first phase, the Commission would evaluate whether the exchanges lost market share and, if so, to which venues. In the second phase of the program, the Commission could reevaluate the level of the access fee cap, and, if appropriate, include a trade-at restriction to encourage the posting of liquidity on exchanges. Importantly, the Commission should consider proceeding with the second phase of the program regardless of the results of the first. It is advisable to test whether a general trade-at provision would improve market quality, particularly given that at least one study has concluded that investors are paying 3,890,624 more per stock per year due to internalization, and that a trade-at rule could have a measureable impact on bid-ask spreads.153 Moreover, a pilot program would help to identify any unintended consequences a trade-at provision could create.154 In fact, recent experience suggests that trade-at rules can have unexpected effects. For example, both Canada and Australia recently implemented robust trade-at rules that failed to increase the amount of liquidity posted on their exchanges. Worse yet, the imposition of a trade-at rule in both countries was followed by a widening of both quoted and effective spreads.155 Various justifications for these somewhat counterintuitive results have been offered, including certain aspects of each nations regulatory and market environments.156 Another possible explanation is that minimum tick size requirements in those countries prevented their exchanges from matching dark venues ability to offer mid-point price improvements.157 According to Commission staff, yet another possible explanation for the unexpected results in Canada and Australia is that these jurisdictions did not allow exchanges to reduce their access fees in connection with the trade-at rule, which may have dissuaded liquidity providers from posting limit orders on the lit exchanges. In developing any pilot programs, the Commission would need to carefully weigh these issues, among others.158 In addition, the Commission should use the pilot program to assess the validity of claims that a trade-at rule could harm both institutional and retail investors.159 For example, some believe that a trade-at rule would hurt institutional investors by limiting their ability to access liquidity in dark venues.160 As for retail investors, some commenters have asserted that a trade-at rule could deprive them of the price improvement and low commissions they currently enjoy when their trades are internalized or sold to OTC market makers.161 Indeed, there is some evidence suggesting that this is correct. It has been reported that retail investors in Canada saw their average price improvement fall by 70 following implementation of the trade-at rule.162 Furthermore, commentators have noted that a trade-at rule could harm retail investors by forcing them to trade on exchanges, where they might be taken advantage of by more informed professional traders, such as high frequency traders.163 The proposed pilot program would offer an opportunity to test these concerns. Nonetheless, since maker-taker rebates remain very much a part of the current market structure, the Commission must promptly take steps to address the conflict-of-interest issues that these rebates create. One step the Commission needs to pursue immediately, together with FINRA, is to provide additional guidance on brokers best execution obligations as they relate to maker-taker rebates and routing decisions. Some have argued that existing guidance on best execution is out of date, and has not kept pace with changes in market structure and automated trading.164 Furthermore, the Commission should move promptly to revise the order routing rule, Rule 606, to require brokers to provide additional information that will help investors gauge the quality of the executions they receive. For example, in addition to the updates discussed in Section IV. c above, Rule 606 could also be revised to require firms to disclose within their 606 reports information from their 605 reports concerning the overall quality of execution delivered by executing market centers.165 Additionally, Rule 606 should split the reporting of routed and executed orders into categories that facilitate a statistical comparison of execution quality and fee disclosure metrics.166 Such disclosures would be helpful, and these changes do not need to wait for a pilot program. Additionally, the Commission should create a page on its website where investors could access all brokers Rule 606 reports in one place, so they could make apples-to-apples comparisons regarding brokers execution quality.167 Finally, to address the claim that retail customers limit orders are not susceptible to the types of conflicts of interest that were identified in the Battalio Study, the Commission should consider making a formal information request to brokers for any data and analyses that would substantiateor refutethis claim. This will enable the Commission to better assess the quality of execution that brokers are delivering for retail investors limit orders. B. Payments for Order Flow Payments for order flow implicate the same conflict-of-interest and market quality issues raised by market fragmentation and the maker-taker pricing model, and the measures outlined above should serve to illuminate the effects of this practice, as well. Yet, the payment for order flow regime presents additional concerns that also need to be specifically examined. For instance, some detractors have expressed concerns that the conflict-of-interest issue is particularly acute in the payment for order flow context because of the sheer amount of money at stake for some brokers.168 In addition, some commenters have expressed concern that retail investors would fare better if their orders were executed on exchanges, rather than by the OTC market makers that purchase their orders and provide a small degree of price improvement.169 These commenters believe that payments for order flow may lead to higher costs and wider spreads.170 Finally, the Commissions report on the May 6, 2010 flash crash noted that the payment for order flow regime exacerbated market instability that day when the OTC market makers that typically purchase and internalize the vast majority of retail investors trades suddenly reversed this practice, and flooded the exchanges with a massive influx of sell orders.171 Some experts, however, believe that the payment for order flow regime has benefitted retail investors. Robust competition, they claim, has forced brokers to pass along to their customers most of the benefits of these payments.172 This may well be true, and it is certainly possible that retail investors situation would not measurably improve if the status quo were altered. But in light of the controversy surrounding this issue, the Commission should look into whether customers could be made better off. For example, what would happen if brokers were forced to pass all payments for order flow along to their customers This would eliminate the existing conflicts of interest, which should go a long way to rebuilding trust in market intermediaries. And although brokers could potentially raise commission rates as a result, retail investors would, in theory, be compensated for this loss by receiving the payments for order flow their orders generate. Although it is possible that this approach would also lead brokers to charge for additional services, such as online investment tools, this could be a far more efficient result, as it would allocate the costs of these services to the customers that actually use them, rather than compelling all customers to bear these costs. This would certainly be a more transparent approach, and the value of transparency cannot be overstated. In addition, the justifications that underpin the payment for order flow regime should be put to the test. For instance, brokers claim that retail customers benefit from the price improvement they receive when their orders are sold to OTC market makers.173 But there is evidence suggesting that retail investors could do better. For example, one broker that sends approximately 95 of its customers orders to exchanges claims that, for the past 8 years, it has consistently provided better price improvement than firms that sell their customers orders to OTC market makers.174 Although the level of this price improvement varied, an independent assessment175 reveals that it has been as high as 53 cents per 100 shares, and has been at least 30 cents per 100 shares two-thirds of the time.176 These facts demand that the Commission study the economic consequences of payments for order flow more closely. In addition, this information suggests that the Commission needs to carefully evaluate the consequences of trade-at rules that may form part of any pilot programs in the near future. For instance, just last week, the Commission approved the tick size pilot program, which includes a limited trade-at rule.177 The Commission should carefully study the effects of that program to determine what lessons, if any, can be gleaned about the consequences of the payment for order flow regime. The need for future studies, however, should not be a reason for delay. It is clear that, in the near term, the Commission needs to take prompt steps to ensure that payments for order flow do not impair brokers ability to deliver best execution. Of course, this is currently difficult as brokers presently do not provide sufficient disclosure about payments for order flow. This should not be acceptable. Rule 606 should promptly be revised to require brokers to disclose to customers the total amount of payments for order flow the broker receives, as well as the average amount of price improvement customers receive on orders sold to OTC market makers. The rule should also be revised to require brokers to disclose the total execution costs of their clients trades, so investors can see how payments for order flow and other factors affect their trading costs. For example, brokers should report not only direct costs, such as commissions and fees paid, but also all benefits that may have reduced those costs, such as price improvement, liquidity rebates, and payments for order flow.178 In addition, the Commission should monitor the experience of other jurisdictions, such as the United Kingdom, that have prohibited payments for order flow entirely.179 In particular, the Commission should determine whether the pervasive deficiencies that led the UKs Financial Conduct Authority (FCA) to ban these payments outright also exist in this country.180 Further, the Commission should work with the FCA to monitor how brokers respond to the ban. For example, the ban is an opportunity to test brokers claims that payments for order flow are vital to keeping retail customers commissions low. The ban also offers an opportunity to determine whether, as some have claimed, market participants will react to the ban by merely seeking alternative ways of providing compensation to those who send them business. Finally, the Commission needs to evaluate the role that the payment for order flow regime could play in making markets less stable, particularly in times of market stress. The Commission should consider the benefits of a rule recommended by the Flash Crash committee that would require internalizers and OTC market makers to be subject to market maker obligations that require them to execute some material portion of their order flow internally during periods of extreme market volatility.181 None of this is to say with certainty that the payment for order flow regime could or should be abolished. For example, one study indicated that the execution quality delivered by OTC market makers hit an all-time high in the final quarter of 2014, suggesting that retail investors are faring well, or at least better than in the past.182 In fact, some experts believe that banning payments for order flow could magnify conflicts of interest, and could create even more difficult challenges, as market participants might respond by finding more opaque ways to pay for order flow.183 In light of the serious concerns discussed above, however, it is important for the Commission to examine the payment for order flow regime carefully. Knowledge is always better than speculation. VI. Conclusion No one can question that our equity markets have undergone a period of transformational change in recent years, and that the structure that has emerged is far more complex and diverse than in the past. There are many indications that this new structure has yielded measurable benefits for investors, both large and small. Yet, it has also come at a price, in the form of palpable conflicts of interest, and an intensely competitive environment that has led, at least in some instances, to less than ideal outcomes for certain market participants. The Commission must work proactively to ensure that our markets are fair and orderly, and that investor protections keep pace with a rapidly evolving marketplace. Hopefully, the concepts, suggestions, and proposals outlined above can help move the process forward. The issues that exist are very complex and I make no claim to having identified any ideal solutions. My hope has been to provide an informed perspective on issues that the Commission must address. Obviously, there are more areas that need examination, including the possibility of excessive intermediation in our markets, the reasons institutional investors trading costs have failed to see any meaningful improvement in the last 13 years,184 possible avenues to incentivize market makers to provide liquidity during periods of market volatility, the propriety of the fees that exchanges charge for data and ancillary services and, of course, an in-depth study of the practices employed by high-frequency traders and the quality of the liquidity they provide. 1 The views I express are my own, and do not necessarily reflect the views of the U. S. Securities and Exchange Commission (the SEC or Commission), my fellow Commissioners, or members of the staff. 2 Securities Exchange Act Release No. 74092, Equity Market Structure Advisory Committee (Jan. 20, 2015), available at www. sec. gov/rules/other/2015/34-74092.pdf . 3 This analytical framework follows that employed by Professors Fox, Glosten, and Rauterberg in their recent article. See Merritt B. Fox, Lawrence R. Glosten, and Gabriel V. Rauterberg, The New Stock Market: Sense and Nonsense . 3 (Mar. 17, 2015), available at papers. ssrn/sol3/papers. cfmabstractid2580002 . 5 James J. Angel, Lawrence E. Harris, and Chester S. Spatt, Equity Trading in the 21 st Century: An Update . 5 (June 21, 2013), available at www. q-group. org/wp-content/uploads/2014/01/Equity-Trading-in-the-21st-Century-An-Update-FINAL1.pdf US Securities and Exchange Commission Market Structure Website, Data, Spreads and Depth by Individual Security, Spreads by Individual Security, 2013 (noting that, for 2013, the bid-ask spread for the most liquid 126 stocks was 1 cent), available at www. sec. gov/data/market-structure/spreads-and-depth-by-individual-security . 6 Id. see also Peter Haslag and Matthew C. Ringgenberg, The Causal Impact of Market Fragmentation on Liquidity . 11, 29 (Apr. 6, 2015) (utilizing a data set that represents the true cross-sectional average of tradeable sic securities in the U. S. marketplace to show that bid-ask spreads have generally decreased since 2004, and are near their lowest levels since that time)(working paper), available at papers. ssrn/sol3/papers. cfmabstractid2591715 . 8 Id. at 4 see also Larry Tabb, CEO, TABB Group, Written Testimony to the United States Senate Committee on Banking, Housing, and Urban Affairs, 5 (Sept. 20, 2012), available at www. banking. senate. gov/public/index. cfmFuseActionFiles. ViewampFileStoreid268afb1b-4c5e-4ec0-8028-fc840b973843. These statistics should not be read to suggest that our equity markets do not face challenges. For example, some analyses demonstrate a downward trend in average trade volume since the financial crisis. A number of explanations for this phenomenon have been offered, including a decline in high frequency trading, a decline in investment banks proprietary trading, and a general shift by investors to passive index funds, options, and futures. See Victor Reklaitis and Anora Mahmudova , Why trading volume is tumbling, explained in 5 charts . MarketWatch (July 7, 2014), available at www. marketwatch/story/why-trading-volume-is-tumbling-explained-in-5-charts-2014-07-07 . 9 Id. at 12 Ed Easterling, Volatility in Perspective . Crestmont Research, 2 (Jan. 6, 2015)(noting that the SampP 500s rolling volatility is currently at 8, and that volatility tends to average near 15), available at www. crestmontresearch/docs/Stock-Volatility-Perspective. pdf see also Peter Haslag and Matthew C. Ringgenberg, The Causal Impact of Market Fragmentation on Liquidity . 11, 29 (Apr. 6, 2015) (covering only the period from 2004 until January 1, 2013, but confirming that volatility is near its lowest levels during that period) (working paper), available at papers. ssrn/sol3/papers. cfmabstractid2591715 . 10 Peter Haslag and Matthew C. Ringgenberg, The Causal Impact of Market Fragmentation on Liquidity . 11, 29 (Apr. 6, 2015) (utilizing a data set that represents the true cross-sectional average of tradeable securities in the U. S. marketplace to show that bid-ask spreads have generally decreased since 2004, and are near their lowest levels since that time)(working paper), available at papers. ssrn/sol3/papers. cfmabstractid2591715 . 11 James J. Angel, Lawrence E. Harris, and Chester S. Spatt, Equity Trading in the 21 st Century: An Update . 14 (June 21, 2013), available at www. q-group. org/wp-content/uploads/2014/01/Equity-Trading-in-the-21st-Century-An-Update-FINAL1.pdf Barrons Online Broker Survey 2015: How they Stack Up . Barrons (Mar. 9, 2015)(listing the top 10 online brokers and noting that none of them charges more than 9.99 for online stock trades, and that all but two charge less), available at online. barrons/articles/SB51367578116875004693704580500193983582362 see also, e. g. . TD Ameritrade, Pricing (May 6, 2015) (offering 9.99 Flat-rate online equity trades), available at www. tdameritrade/pricing. page ETrade, Commissions amp Fees (May 6, 2015) (offering 9.99 flat-rate commissions for up to 149 online stock and options trades per quarter), available at us. etrade/e/t/estation/pricingid1206010000 Charles Schwab, Fees and Minimums (May 6, 2015) (offering a flat 8.95 rate for online stock and ETF trades), available at www. schwab/public/schwab/investing/pricingservices/feesminimums . 13 Investment Technology Groups Global Cost Review Q3/2014, 8 (reporting total costs of trading U. S. large cap stocks as 32.9 basis points) (Jan. 14, 2015), available at www. itg/marketing/ITGGlobalCostReviewQ3201420150205.pdf Investment Technology Groups Global Cost Review 2010/Q2, 6 (reporting total costs of trading U. S. large cap stocks as 40.8 basis points (Oct. 27, 2010), available at www. itg/wp-content/uploads/2009/12/ITGGlobalCostReview2010Q2Final. pdf . 14 Charles Collver, A characterization of market quality for small capitalization US equities . U. S. Securities and Exchange Commission, 1 (2014) (noting that small cap stocks had larger quoted and effective spreads and traded much lower volumes than mid cap stocks. They also showed lower depth at the inside quotes and beyond.), available at www. sec. gov/marketstructure/research/smallcapliquidity. pdf Larry Tabb, CEO, TABB Group, Written Testimony to the United States Senate Committee on Banking, Housing, and Urban Affairs, 5 (Sept. 20, 2012), available at www. banking. senate. gov/public/index. cfmFuseActionFiles. ViewampFileStoreid268afb1b-4c5e-4ec0-8028-fc840b973843 . 16 Sal Arnuk and Joseph Saluzzi , Broken Markets: How High Frequency Trading and Predatory Practices on Wall Street Are Destroying Investor Confidence and Your Portfolio . 219 (2012). 17 Thomas Peterffy, Chairman and CEO of Interactive Brokers Group, Comments Before the 2010 General Assembly of the World Federation of Exchanges, 1 (Oct. 11, 2010), available at www. interactivebrokers/download/worldFederationOfExchanges. pdf . 18 Michael Lewis, Flash Boys . 40 (2014) see also Max Ehrenfreund, A veteran programmer explains how the stock market became rigged, The Washington Post (Apr. 4, 2014)(quoting Eric Scott Hunsader, founder of Nanex, as saying so when Michael Lewis used the word rigged, hes right. The stock market is rigged. ), available at www. washingtonpost/blogs/wonkblog/wp/2014/04/04/a-veteran-programmer-explains-how-the-stock-market-became-rigged/ . 20 Thomas Peterffy, Chairman and CEO of Interactive Brokers Group, Comments Before the 2010 General Assembly of the World Federation of Exchanges, 2 (Oct. 11, 2010), available at www. interactivebrokers/download/worldFederationOfExchanges. pdf. 21 Charles Schwab and Walt Bettinger, Schwab Statement on High-Frequency Trading (Apr. 3, 2014), available at pressroom. aboutschwab/press-release/corporate-and-financial-news/schwab-statement-high-frequency-trading but see Kathleen Pender, Charles Schwab CEO clarifies high-frequency trading remarks . San Francisco Chronicle (Apr. 25, 2014) (noting that Walt Bettinger, CEO of Charles Schwab, later said that intelligent people can make sound arguments on either side of the issues around high-frequency trading.), available at www. sfchronicle/business/networth/article/Charles-Schwab-CEO-clarifies-high-frequency-5430935 . 24 BlackRock, US Equity Market Structure: An Investor Perspective . 2 (Apr. 2014) (noting that, while investors have benefitted from rules like Reg NMS, it is also important to recognize that these regulations have fostered a complex and highly fragmented market where trade order flow must navigate 13 exchanges, 40 dark pools, and a handful of Electronic Communication Networks (ECNs). the ability to place orders in all venues comes at a cost. ), available at www. blackrock/corporate/en-us/literature/whitepaper/viewpoint-us-equity-market-structure-april-2014.pdf . 25 Nina Mehta, Fragmentation of U. S. Equities Market Criticized in SEC Panels . BloombergBusiness (June 23, 2010)(quoting Matt Schrecengost, chief operating officer at Jump Trading LLC, a proprietary trading firm in Chicago, as saying the U. S. equities market is so complex normally that when you add in a situation like the May 6 flash crash the complexity turns into confusion), available at www. bloomberg/news/articles/2010-06-23/fragmentation-of-u-s-stock-market-criticized-at-sec-panels-in-washington . 26 The term dark pools generally refers to electronic stock trading platforms in which pre-trade bids and offers are not published and price information about the trade is only made public after the trade has been executed. Gary Shorter and Rena S. Miller, Dark Pools in Equity Trading: Policy Concerns and Recent Developments . i (Sept. 26, 2014), available at www. fas. org/sgp/crs/misc/R43739.pdf . 27 Brokers preference orders when they route their clients marketable orders to dealers in exchange for various monetary and nonpecuniary payments for order flow. Larry Harris, Trading and Exchanges: Market Microstructure for Practitioners . (2003). 28 When you place an order to buy or sell a stock, your broker has choices on where to execute your order. Instead of routing your order to a market or market-makers for execution, your broker may fill the order from the firms own inventory. Isso é chamado internalização. U. S. Securities and Exchange Commission, Fast Answers . available at www. sec. gov/answers/internalization. htm . 29 See, e. g. . Daniel Weaver, The Trade-At Rule, Internalization, and Market Quality . 3 (Apr. 17, 2014)(finding strong support for the existence of a negative relationship between the degree of internalization and market quality, and concluding that investors are paying 3,890,624 more per stock per year due to internalization.), available at papers. ssrn/sol3/papers. cfmabstractid1846470 . 30 Under the maker-taker pricing model, the traders whose orders make or furnish liquidity to a trading venue by posting new bids or offers receive a rebate, whereas traders who take or remove liquidity by hitting an existing bid or lifting an existing offer pay a take fee. See Stanislav Dolgopolov, The Maker-Taker Pricing Model and Its Impact on Securities Market Structure . 8 Va. L. amp Bus. Rev. 234-35 (June 27, 2014), available at bit. ly/1mfme9M. 31 As a way to attract orders from brokers, some exchanges or market-makers will pay your brokers firm for routing your order to them. This is called payment for order flow. U. S. Securities and Exchange Commission, Fast Answers . available at www. sec. gov/answers/payordf. htm . 32 Testimony of Robert Battalio, Professor of Finance, Mendoza College of Business, University of Notre Dame, before the U. S. Senate Permanent Subcommittee on Investigations (June 17, 2014), available at www. hsgac. senate. gov/download/id83e63371-7a55-4eb4-99e8-d5973a5456b3 Editorial, The Hidden Cost of Trading Stocks . N. Y. Times (June 22, 2014) (suggesting that maker-taker fees are corrupting brokers, who under the guise of making subjective judgments about best execution, were routinely sending orders to venues that paid the highest rebates, and concluded by calling for greater regulation or elimination of maker-taker fees), available at www. nytimes/2014/06/23/opinion/best-execution-and-rebates-for-brokersr0 . 33 Jennifer Victoria Christine Deana, Paradigm Shifts amp Unintended Consequences: The Death Of The Specialist, The Rise Of High Frequency Trading, amp The Problem Of Duty-Free Liquidity In Equity Markets, FIU Law Review, 218, 235 (Fall 2012)(noting that Reg. NMS was fairly successful because the rise of electronic markets increased competition and reduced transaction costs, but that the resulting explosion of venues also had unintended consequencesconsequences that run contrary to the good intentions of the national market system mandate.), available at papers. ssrn/sol3/papers. cfmabstractid2249294 . 34 Larry Tabb, Can Reg NMS Be Fixed, Tabb Forum (Oct. 2, 2013) (noting that fixing Reg NMS to solve all of the industrys problems together is next to impossible. Depending on your role in the market, the rules can swing from significantly beneficial to very detrimental. Where you stand on the issues depends on where you sit.), available at tabbforum/opinions/can-reg-nms-be-fixed . 36 Lawrence Harris, Trading and Exchanges: Market Microstructure for Practitioners . 216-17 (2003). Professor Harris refers to these traders as utilitarian traders. See id. at 192-94. They include, among others, the following: (i) investors who seek to save current income for future consumption, while obtaining a reasonable rate of return (ii) borrowers who rely on the promise of future revenues to borrow money to finance current investment (iii) asset exchangers, who obtain an asset of greater immediate value than the one they tender and (iv) hedgers, who trade in equities to reduce risk. Identidade. 38 Id. Professor Harris notes that liquid markets benefit the public through the externalities that utilitarian traders produce when they use markets to conduct their businesses more efficiently. These externalities generally result from production efficiencies that traders can realize by using markets to exchanges assets, hedge, or share risks. Identidade. at 214. 39 Ross Levine and Sara Zervos, Stock Markets, Banks, and Economic Growth . 88 Am. Econ. Rev. 537-58 (1998)(finding a significant positive correlation between stock market liquidity and current and future rates of economic growth, after controlling for economic and political factors.). 40 Id. at 216-17 see also Committee on the Global Financial System, Market-making and proprietary trading: Industry trends, drivers and policy implications . 1 (Nov. 2014)(noting that market-makers serve a crucial role in financial markets by providing liquidity to facilitate market efficiency and functioning.), available at www. bis. org/publ/cgfs52.pdf. Of course, the interests of profit-motivated traders and investors and issuers are all sometimes aligned. See Securities Exchange Act Release No. 61358 (Jan. 14, 2010), 75 FR 3593, 3603 (Jan. 21, 2010), available at www. gpo. gov/fdsys/pkg/FR-2010-01-21/pdf/2010-1045.pdf . 42 See, e. g. . U. S. Securities and Exchange Commission, The Investors Advocate: How the SEC Protects Investors, Maintains Market Integrity, and Facilitates Capital Formation . (June 10, 2013)(noting that the mission of the U. S. Securities and Exchange Commission is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.), available at www. sec. gov/about/whatwedo. shtml s ee also, e. g., 15 U. S.C. 78k(a)(2). 47 Securities Exchange Act Release No. 61358 (Jan. 14, 2010), 75 FR 3593, 3597 (Jan. 21, 2010)(noting that the five objectives set forth in Section 11A can, at times, be difficult to reconcile.), available at www. gpo. gov/fdsys/pkg/FR-2010-01-21/pdf/2010-1045.pdf. For example, the goal of matching investor orders can be difficult to reconcile with the objective of promoting competition among markets. Order interaction promotes a system that maximizes the opportunities for the most willing seller to meet the most willing buyer. When many trading centers compete for order flow in the same stock, however, such competition can lead to the fragmentation of order flow in that stock. Fragmentation can inhibit the interaction of investor orders and thereby impair certain efficiencies and the best execution of investors orders. Identidade. (internal citation and quotation marks omitted). 48 See, e. g. . U. S. Securities and Exchange Commission, The Investors Advocate: How the SEC Protects Investors, Maintains Market Integrity, and Facilitates Capital Formation . (June 10, 2013)(noting that the mission of the U. S. Securities and Exchange Commission is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.), available at www. sec. gov/about/whatwedo. shtml s ee also, e. g., 15 U. S.C. 78k(a)(2). 49 See BATS Market Volume Summary, U. S. Stock Exchanges (Apr. 29, 2015), available at www. batstrading/marketsummary/. Of the eleven exchanges, three are operated by the New York Stock Exchange, three are operated by NASDAQ, four are operated by BATS, and the final one is CHX. 50 See FINRA ATS Transparency Data (Apr. 6, 2015), available at ats. finra. org/TradingParticipants. Although 85 alternative trading systems were registered with the Commission as of April 6, 2015, only 36 are currently trading. A list of alternative trading systems registered with the Commission is available at www. sec. gov/foia/ats/atslist0415.pdf . 51 Testimony of Stephen Luparello, Director of the Division of Trading and Markets, before the United States Senate Subcommittee on Securities, Insurance, and Investment, Committee on Banking, Housing, and Urban Affairs (Mar. 10, 2015), available at www. sec. gov/news/testimony/testimony-venture-exchanges. 53 Securities Exchange Act Release No. 51808 (June 9, 2005), 70 FR 37496, 37499 (June 29, 2005)(noting that the national market system. incorporates two distinct types of competition competition among individual markets and competition among individual orders that together contribute to efficient markets. Vigorous competition among markets promotes more efficient and innovative trading services, while integrated competition among orders promotes more efficient pricing of individual stocks for all types of orders, large and small. Together, they produce markets that offer the greatest benefits for investors and listed companies), available at www. gpo. gov/fdsys/pkg/FR-2005-06-29/pdf/05-11802.pdfpage125 see also 15 U. S.C. 78k-1(a)(1)(C)(ii). 54 For purposes of the order protection rule, trading centers include not only the lit exchanges, but also dark pools, electronic communication networks, off-exchange market makers, and broker-dealers that internalize customer orders. 55 Rule 611 of Regulation NMS, 17 CFR 242.611, available at www. law. cornell. edu/cfr/text/17/242.611. The order protection rule extends only to the national best bid or offer, and not to inferior quotes that comprise an exchanges depth of book. Further, the rule includes the best bid or offer on FINRAs alternative display facility, but that facility currently has no active participants. See FINRA, Alternative Display Facility, Participants, available at www. finra. org/industry/adf/participants . 56 Haim Bodek, The Problem of HFT: Collected Writings on High Frequency Trading amp Stock Market Reform . 37 (2012). 57 Larry Tabb, CEO, TABB Group, Written Testimony to the United States Senate Committee on Banking, Housing, and Urban Affairs, 5 (Sept. 20, 2012), available at www. banking. senate. gov/public/index. cfmFuseActionFiles. ViewampFileStoreid268afb1b-4c5e-4ec0-8028-fc840b973843. Tabb notes that: When the NYSE had the dominant share of NYSE-listed market activity, the NYSE acted like a monopoly. Execution times were long, costs were high, and institutional investors were not happy with their execution quality. The implementation of Reg NMS changed this. It forced the NYSE to compete against other exchanges for market share. This caused the NYSE to lower cost, streamline their technologies, and expedite their average execution time from approximately 11 seconds, circa 2005, to under a millisecond today. 58 A lit trading center is one where a limit order is immediately visible to all market participants and thus has an immediate price impact as market participants revise their beliefs about the fundamental value. In contrast, if the limit order instead rests in a dark market, no one except the order submitter can observe the order and none of the information contained in the limit order can be impounded into prices until a trade occurs. If the limit order does not execute, the market will never know about the order. Carole Comerton-Forde and Ta-lis J. Putnin,, Dark trading and price discovery, 6 (Jan 6, 2015), available at papers. ssrn/sol3/papers. cfmabstractid2183392ampdownloadyes see also Irene Aldridge, High Frequency Trading: A Practical Guide to Algorithmic Strategies and Trading Systems . 221 (2013)(defining a lit venue as a traditional exchange-like trading venue, where the limit order book is observable by all engaged market participants.). 59 Michael A. Goldstein, Andriy V. Shkilko, Bonnie F. Van Ness, and Robert A. Van Ness, Competition in the Market for NASDAQ-listed Securities . 1 (Oct. 16, 2005), available at faculty. babson. edu/goldstein/research/Nasdaq-Competition28.pdf Gary Shorter and Rena S. Miller, Dark Pools in Equity Trading: Policy Concerns and Recent Developments, 8 (Sept. 26, 2014), available at www. fas. org/sgp/crs/misc/R43739.pdf. 60 BATS, U. S. Stock Exchanges Market Volume Summary (Apr. 30, 2015)(five-day average percentage of market), available at www. batstrading/marketsummary/ . 61 See Amy Kwan, Ronald Masulis, and Thomas McInish, Trading Rules, Competition for Order Flow and Market Fragmentation . 7 ECGI Working Paper Series in Law (2014)(There is widespread concern that dark trading may be harming market quality.), available at papers. ssrn/sol3/papers. cfmabstractid2365603ampdownloadyes. Although dark pools and internalizers do not transmit their best quotations to the consolidated tape, they do transmit their completed trades to the tape. Thus, they provide post-trade price transparency. 62 See generally U. S. Securities and Exchange Commission, Equity Market Structure Literature Review Part I: Market Fragmentation (Oct. 7, 2013), available at www. sec. gov/marketstructure/research/fragmentation-lit-review-100713.pdf . 63 Id. (noting that the studies looking at lit venues, which are based primarily on European markets, generally find that the visible fragmentation resulted in market quality improvements in the form of reduced transaction costs.) see also, e. g. . Hans Degryse, Frank de Jong, and Vincent van Kervel, The impact of dark trading and visible fragmentation on market quality . (2013)(finding that increased fragmentation across lit venues resulted in narrower spreads and increased depth), available at papers. ssrn/sol3/papers. cfmabstractid1815025ampdownloadyes Mahendraraja Nimalendran and Ray Sugata, Informational Linkages between dark and lit trading venues (2012)(finding that the advent of dark pools facilitates price discovery for liquid stocks by allowing informed agents to trade strategically across lit and dark venues, but that this does not hold true for illiquid stocks), available at www. sec. gov/divisions/riskfin/seminar/nimalendran090612.pdf Maureen OHara and Mao Ye, Is market fragmentation harming market quality . 100 J. Finl Econ. 459 (2011)(finding that increased off-exchange trading (i) does not impair liquidity or market information efficiency, (ii) led to lower effective spreads and execution speeds, and (iii) generally benefits small firms and does not harm large firms), available at web. law. columbia. edu/sites/default/files/microsites/capital-markets/Market20Fragmentation20Paper. pdf Sabrina Buti, Barabara Rindi, and Ingrid M. Werner, Diving into dark pools . (2011)(finding that increased dark pool activity is associated with narrower spreads, more depth, and lower short-term volatility, suggesting an improvement in price efficiency), available at www. erim. eur. nl/fileadmin/erimcontent/documents/WernerApril3.pdf Christine Jiang, Thomas McInish, and James Upson, Why Fragmented Markets Have Better Market Quality: The Flight of Liquidity Order Flows to Off Exchange Venues . (2011)(finding that the diversion of uninformed trade flows to off-exchange venues improves price discovery on the lit exchanges, which become dominated by informed traders), available at utminers. utep. edu/jeupson/pages/Fragmented. pdf Ryan riordan, Andreas Storkenmaier, Martin Wagener, Do Multilateral Trading Facilities Contribute to Market Quality . (May 25, 2011) (finding that the arrival of ATSs in European markets contributed to the price discovery process and led to improvements in market quality), available at papers. ssrn/sol3/papers. cfmabstractid1852769ampdownloadyes . Notably, one study of European markets concluded that increased fragmentation across lit venues reduced price efficiency. Yet, this study ascribed this phenomenon to Europes lack of a consolidated tape, which the authors characterize as one of the primary tools to minimize the potential harmful effects of trading fragmentation on market liquidity and price discovery process and to boost competition between trading venues. Simone Francesco Fioravanati and Monica Gentile, The impact of market fragmentation on European stock exchanges . 7 (2013)(finding that increased fragmentation across lit venues resulted in narrower spreads and increased depth), available at papers. ssrn/sol3/papers. cfmabstractid1815025ampdownloadyes. 64 Hans Degryse, Frank de Jong, and Vincent van Kervel, The impact of dark trading and visible fragmentation on market quality . (2013)(finding that increased visible fragmentation may cease to be beneficial when it exceeds a certain level), available at papers. ssrn/sol3/papers. cfmabstractid1815025ampdownloadyes Chartered Financial Analyst (CFA) Institute, Dark Pools, Internalization, and Equity Market Quality (2012), available at www. cfapubs. org/doi/pdf/10.2469/ccb. v2012.n5.1 . 65 CFA Institute, Dark Pools, Internalization, and Equity Market Quality . 58-59 (2012), available at www. cfapubs. org/doi/pdf/10.2469/ccb. v2012.n5.1. The Chartered Financial Analyst Institute also provided estimates of the tipping points for large, medium, and small cap stocks, both for dark pools and internalization. These estimates were as follows: 66 Castura, J. R. Litzenberger and R. Gorelick, RGM Advisors, LLC, Market Efficiency and Microstructure Evolution in U. S. Equity Markets: A High-Frequency Perspective (March 2012 Update) . at 2-3 (March 2012) (providing charts indicating that, for both Russell 1000 and Russell 2000 stocks, quoted bid-ask spreads narrowed and displayed liquidity increased from 2006 through 2011), available at www. sec. gov/comments/s7-02-10/s70210-364.pdf James J. Angel, Lawrence E. Harris, and Chester S. Spatt, Equity Trading in the 21 st Century: An Update . 5 (June 21, 2013), available at www. q-group. org/wp-content/uploads/2014/01/Equity-Trading-in-the-21st-Century-An-Update-FINAL1.pdf. 67 The CFA study hypothesizes that market quality will begin to suffer when roughly half of all trading occurs in dark venues. Yet, only approximately 36 of all trades currently take place in such venues. See CFA Institute, Dark Pools, Internalization, and Equity Market Quality (2012), available at www. cfapubs. org/doi/pdf/10.2469/ccb. v2012.n5.1 . 68 See, e. g. . Daniel Weaver, The Trade-At Rule, Internalization, and Market Quality . (Apr. 17, 2014)(finding that an NYSE-listed stock with 40 of its volume reported through FINRAs off-exchange trade-reporting facility will, on average, increase the cost of trading 1.28 cents), available at papers. ssrn/sol3/papers. cfmabstractid1846470 Daniel Weaver, Off Exchange Trading and Market Quality in a Fragmented Market . 2 (2010)(We find strong evidence that such off-exchange reporting is associated with a reduction in market quality. In particular we find that stocks with higher levels of off-exchange reporting have wider spreads (quoted, effective, and realized). We also find that that increased off-exchange reporting is associated with more price impact per trade and higher volatility.), available at www. sec. gov/comments/s7-02-10/s70210-127.pdf . 69 See Mary Jo White, Chair, Securities and Exchange Commission, Speech at the Sandler, ONeill amp Partners, L. P. Global Exchange and Brokerage Conference (June 5, 2014), available at www. sec. gov/News/Speech/Detail/Speech/1370542004312.U5HIfmwJiw ) . 78 Rule 600(b)(47) of Regulation NMS defines NMS stock to mean any NMS security other than an option. Rule 600(b)(46) defines NMS security to mean any security for which trade reports are made available pursuant to an effective transaction reporting plan. In general, NMS stocks are those that are listed on a national securities exchange. 17 CFR 240.600(b)(17). 79 FIA Principal Traders Group, Simplifying U. S. Equity Market Structure . 2 (Jan. 28, 2015)(noting that the order protection rule requires trading venues to collect and process data from other venues and must be able to handle a variety of instructions about how to handle orders that appear to trade through. Many venues have developed elaborate routing mechanisms to comply.), available at ptg. fia. org/sites/default/files/contentattachments/FIA20PTG20Position20-20Simplifying20US20Equity20Market20Structure. pdf . 80 ICEs Six Recommendations for Reforming Markets, The Wall Street Journal, Moneybeat (Dec. 18, 2014)(We believe fragmentation should be limited and that trading centers should meet a minimum threshold of 1 market share to be covered as a protected quote.), available at blogs. wsj/moneybeat/2014/12/18/ices-six-recommendations-for-reforming-markets/ Open Letter to All U. S. Securities Industry Participants, (Jan. 6, 2015) (calling for the implementation of a threshold of 1 market share before a market is considered protected under Regulation NMS or is eligible to participate in the national market system plans, a standard which would reduce fragmentation and market complexity.), available at cdn. batstrading/resources/newsletters/OpenLetter010615.pdf BlackRock, US Equity Market Structure: An Investor Perspective, 2 (Apr. 2014) (BlackRock encourages policy makers to examine whether exchanges should be required to maintain a minimum market share in order to retain exchange status and any associated benefits.), available at www. blackrock/corporate/en-us/literature/whitepaper/viewpoint-us-equity-market-structure-april-2014.pdf . 82 Jingle Liu, Darren Marabello, Kapil Phadnis and Gary Stone, Toxicity: Its Not Just Reserved for Dark Pools . Bloomberg Tradebook (Nov. 22, 2013), available at www. bloombergtradebook/blog/toxicity-its-not-reserved-just-for-the-dark-pools/ . 83 Jingle Liu, Darren Marabello, Kapil Phadnis and Gary Stone, Toxicity: Its Not Just Reserved for Dark Pools . Bloomberg Tradebook (Nov. 22, 2013), available at www. bloombergtradebook/blog/toxicity-its-not-reserved-just-for-the-dark-pools/ . 84 ICEs Six Recommendations for Reforming Markets, The Wall Street Journal, Moneybeat (Dec. 18, 2014)(We believe fragmentation should be limited and that trading centers should meet a minimum threshold of 1 market share to be covered as a protected quote.), available at blogs. wsj/moneybeat/2014/12/18/ices-six-recommendations-for-reforming-markets/ Open Letter to All U. S. Securities Industry Participants (Jan. 6, 2015) (calling for the implementation of a threshold of 1 market share before a market is considered protected under Regulation NMS or is eligible to participate in the national market system plans, a standard which would reduce fragmentation and market complexity.), available at cdn. batstrading/resources/newsletters/OpenLetter010615.pdf BlackRock, US Equity Market Structure: An Investor Perspective, 2 (Apr. 2014) (BlackRock encourages policy makers to examine whether exchanges should be required to maintain a minimum market share in order to retain exchange status and any associated benefits.), available at www. blackrock/corporate/en-us/literature/whitepaper/viewpoint-us-equity-market-structure-april-2014.pdf Jingle Liu, Darren Marabello, Kapil Phadnis and Gary Stone, Toxicity: Its Not Just Reserved for Dark Pools . Bloomberg Tradebook (Nov. 22, 2013), available at www. bloombergtradebook/blog/toxicity-its-not-reserved-just-for-the-dark-pools/ . 87 BATS, U. S. Stock Exchanges Market Volume Summary (May 1, 2014 and May 1, 2015)(five-day average percentage of market), available at www. batstrading/marketsummary/ . 88 Securities and Exchange Act Release No. 73639, Regulation Systems, Compliance and Integrity . (Nov. 19, 2014), available at www. sec. gov/rules/final/2014/34-73639.pdf . 89 Larry Tabb, CEO, TABB Group, Written Testimony to the United States Senate Committee on Banking, Housing, and Urban Affairs, 5 (Sept. 20, 2012)(noting that once there are multiple places to trade, liquidity gets spread out among exchanges. trade size declines, and time priority becomes meaningless.), available at www. banking. senate. gov/public/index. cfmFuseActionFiles. ViewampFileStoreid268afb1b-4c5e-4ec0-8028-fc840b973843 . 91 John McCrank, IEXS exchange plan stirs U. S. stocks queue jumping argument . Reuters (Apr. 21, 2014)(noting that IEX has implemented electronic speed bumps in order to neutralize the speed advantages of high frequency traders, and has also adopted the broker preferencing approach that is utilized in Canada, which gives brokers the first shot at trading against orders that come from their own firms.), available at www. reuters/article/2014/04/21/us-markets-regulations-iex-idUSBREA3K06K20140421 . 92 BATS, U. S. Stock Exchanges Market Volume Summary (May 1, 2014 and May 1, 2015)(five-day average percentage of market), available at www. batstrading/marketsummary/ . 93 John McCrank, IEXS exchange plan stirs U. S. stocks queue jumping argument . Reuters (Apr. 21, 2014)(noting that, as of April 2014, around half a percent of all U. S. equities trade on IEX.), available at www. reuters/article/2014/04/21/us-markets-regulations-iex-idUSBREA3K06K20140421 95 Scott Patterson and Jenny Strasburg, IEX to Apply for Exchange Status, The Wall Street Journal (Sept. 2, 2014), available at www. wsj/articles/iex-to-apply-for-exchange-status-1409709842 . 97 15 U. S.C. 78mm(a) see also 17 CFR 240.0-12 (setting forth the Commissions procedures for filing applications for orders for exemptive relief), available at www. law. cornell. edu/cfr/text/17/240.0-12. Moreover, such relief need not be limited to a request to decouple entirely from the exchange in question. A request for exemptive relief could seek to address other issues. For example one group of industry experts has suggested seeking a broadening of the one-cent price band that currently applies under the order protection rule. See Jingle Liu, Darren Marabello, Kapil Phadnis and Gary Stone, Toxicity: Its Not Just Reserved for Dark Pools . Bloomberg Tradebook (arguing that broadening the order protection rules trading band from one cent to three or five cents would give broker-dealers greater control over avoiding toxic venues and. a limited ability to trade around them. ISO (inter-market sweep) orders would adhere to a 3-cent band. This could also have an ancillary effect of slowing down the markets message traffic because it would mute the race to the top of the queue.), available at www. bloombergtradebook/blog/toxicity-its-not-reserved-just-for-the-dark-pools/ . 99 Jacob Bunge, A Suspect Emerges in Stock-Trade Hiccups: Regulation NMS, The Wall Street Journal (Jan. 27, 2014), available at www. wsj/articles/SB10001424052702303281504579219962494432336 . 100 Jacob Bunge, A Suspect Emerges in Stock-Trade Hiccups: Regulation NMS, The Wall Street Journal (Jan. 27, 2014), available at www. wsj/articles/SB10001424052702303281504579219962494432336 . 101 See, e. g. . Letter from NYSE Euronext to Elizabeth M. Murphy, Secretary, U. S. Securities and Exchange Commission (Apr. 23, 2010), available at www. sec. gov/comments/s7-02-10/s70210-154.pdf Letter from Nasdaq OMX to Elizabeth M. Murphy, Secretary, U. S. Securities and Exchange Commission (Apr. 30, 2010), available at www. sec. gov/comments/s7-02-10/s70210-168.pdf Letter from KOR Group, LLC to Elizabeth M. Murphy, Secretary, U. S. Securities and Exchange Commission (Apr. 4, 2010), available at www. sec. gov/comments/s7-02-10/s70210-413.pdf . 103 Chair Mary Jo White. Enhancing Our Equity Market Structure . Sandler ONeill amp Partners, L. P. Global Exchange and Brokerage Conference (June 5, 2014), available at www. sec. gov/News/Speech/Detail/Speech/1370542004312 . 104 See Letter from Senator Edward E. Kaufman to Mary Shapiro, U. S. Securities and Exchange Commission, dated November 20, 2009, available at www. sec. gov/comments/s7-27-09/s72709-96.pdf see Letter from KOR Group, LLC to Elizabeth M. Murphy, Secretary, U. S. Securities and Exchange Commission (Apr. 4, 2010), available at www. sec. gov/comments/s7-02-10/s70210-413.pdf . 105 Securities Exchange Act Release No. 51808 (June 9, 2005), 70 FR 37496, 37499 (June 29, 2005)( The national market system is premised on promoting fair competition among individual markets. ), available at www. gpo. gov/fdsys/granule/FR-2005-06-29/05-11802 . 106 See Shawn M. ODonoghue, The Effect of Maker-Taker Fees on Investor Order Choice and Execution Quality in U. S. Stock Markets . 41 (Jan. 23, 2015)(showing that, as of May 2013, all 11 exchanges had implemented either the maker-taker pricing model, or its cousin, the taker-maker pricing model), available at people. stern. nyu. edu/jhasbrou/SternMicroMtg/SternMicroMtg2015/Papers/MakerTakerODonoghue. pdf Scott Patterson and Andrew Ackerman, Regulators Weigh Curbs on Trading Fees . The Wall Street Journal (Apr. 14, 2014), available at www. wsj/articles/SB10001424052702303887804579501881218287694 . 107 As a way to attract orders from brokers, some. market-makers will pay your brokers firm for routing your order to them perhaps a penny or more per share. This is called payment for order flow. Payment for order flow is one of the ways your brokers firm can make money from executing your trade. U. S. Securities and Exchange Commission, Fast Answers, Payment for Order Flow, (June 25, 2007), available at www. sec. gov/answers/payordf. htm. 108 Haim Bodek, The Problem of HFT: Collected Writings on High Frequency Trading amp Stock Market Reform . 10-12 (2012). 110 Letter from Larry Tabb, Founder amp CEO, TABB Group, to The Honorable Carl Levin, U. S. Senator and Chairman, Permanent Subcommittee on Investigations, dated Aug. 11, 2014 (noting that payment for order flow allows brokers to reduce retail commissions, invest in better client-facing technology, and provide a better customer-facing environment, and that, if retail investors marketable orders are routed directly to exchanges, those orders likely will trade at either the best bid or offer, forcing the retail investor (using a market order) to receive the least and or pay the most. ), available at www. tradersmagazine/news/viewpoints/tabb-group-ceo-writes-levin-disagrees-on-ban-of-payment-for-order-flow-112785-1zkPrintabletrue . 111 Angel, Harris, Spatt, Equity Trading in the 21st Century, 8. Recommendations for SEC Rulemaking Attachment February 23, 2010 1.usa. gov/1smLNvo Dave Lauer, Maker-Taker and the Role of the Regulator . (Dec. 5, 2013)(noting that The maker-taker pricing scheme creates a fundamental conflict of interest that works against the investor and puts exchanges between a rock and a hard place, requiring regulatory intervention.), available at kortrading/maker-taker-and-the-role-of-the-regulator/ Larry Harris, Maker-Taker Pricing Effects on Market Quotations . (Nov. 14, 2013)(noting that evidence thus strongly suggests that maker-taker pricing indeed has affected average bid-ask spreads and average quotation sizes for stocks often trading at one-tick spreads.), available at www. management. tau. ac. il/Eng/Uploads/dbsAttachedFiles/Maker. pdf . 112 Bradley Hope, New Boss Prepares to Reorient NYSE . The Wall Street Journal, (Nov. 13, 2013), on. wsj/1qUfgyB . 113 Everett Rosenfeld, Wall Street elite call for maker-taker changes . CNBC (July 28, 2014), available at www. cnbc/id/101872268. The article does not make specify whether the 6 figure is net or gross, but figures for Nasdaq suggest that take fees are a substantial portion of exchanges income. Specifically, according to one study, take fees amounted to 34.7 of Nasdaqs net income for 2012. See Shawn M. ODonoghue, The Effect of Maker-Taker Fees on Investor Order Choice and Execution Quality in U. S. Stock Markets . 1 (Jan. 23, 2015), available at people. stern. nyu. edu/jhasbrou/SternMicroMtg/SternMicroMtg2015/Papers/MakerTakerODonoghue. pdf . 114 Everett Rosenfeld, Wall Street elite call for maker-taker changes . CNBC (July 28, 2014), available at www. cnbc/id/101872268 . 116 Joe Ratterman, Time to take a break from maker-taker . (Feb. 5, 2015)(noting that with 11 US equities exchanges competing against each other not to mention dozens of off-exchange alternative trading systems (ATSs) for order flow, having a competitive pricing regime is important for exchanges.), available at www. thetradenews/news/AssetClasses/Equities/Timetotakeabreakfrommaker-taker. aspx . 118 Adverse selection is the risk that the price of a stock will move against a traders interests after a trade is executed. Lawrence Harris, Trading and Exchanges: Market Microstructure for Practitioners . 77 (2003). 119 Marketable orders are either market orders, or buy and sell limit orders whose limit price is at or above/below the current market price. A marketable buy limit order would have a limit price set at or above the current ask in the market. See ibkb. interactivebrokers/node/194 . 122 Securities Exchange Act Release No. 73967 (Dec. 30, 2014)(SR-NASDAQ-2014-128), available at www. sec. gov/rules/sro/nasdaq/2014/34-73967.pdf. The fee for orders to immediately buy any of the stocks in the program through Nasdaq will drop to 5 cents per 100 shares, from 30 cents per 100 shares. Rebates on those stocks for resting orders sent to the exchange will fall to 2 cents per 100 shares, 4 cents per 100 shares, or in some cases be dropped all together, depending on the type of order. See John McCrank, Nasdaq names 14 stocks to test lower fee and rebate program . Reuters (Nov. 17, 2014), available at www. reuters/article/2014/11/17/nasdaq-omx-fees-idUSL2N0T71GG20141117 . 125 Robert Battalio, Shane A. Corwin, Robert Jennings, Can Brokers Have it All On the Relation between Make-Take Fees And Limit Order Execution Quality . 4 (Mar. 5, 2014), available at papers. ssrn/sol3/DataIntegrityNotice. cfmabid2367462 see also Testimony of Robert Battalio, Professor of Finance, Mendoza College of Business, Notre Dame, before the U. S. Senate Permanent Subcommittee on Investigations of the Committee on Homeland Security and Governmental Affairs, 5 (June 24, 2014)(noting that his study presents evidence from Rule 606 filings that four popular retail brokers made order routing decisions in the fourth quarter of 2012 that appear to maximize the liquidity rebates generated from limit order executions. Specifically, these brokers appear to route their customers standing limit orders to a single exchange that pays the maximum liquidity rebate.), available at www. hsgac. senate. gov/subcommittees/investigations/hearings/conflicts-of-interest-investor-loss-of-confidence-and-high-speed-trading-in-us-stock-markets . 126 Id. Battalio explains that, to pay the highest rebate, the exchange must also charge the highest take fee. This dissuades liquidity takers from routing their orders to this exchange, thereby reducing the likelihood that the resting limit orders will be executed. Identidade. at 1-2. 127 Robert Battalio, Shane A. Corwin, Robert Jennings, Can Brokers Have it All On the Relation between Make-Take Fees And Limit Order Execution Quality . 4 (Mar. 5, 2014)(noting that the proprietary data used for this study came from a large investment bank, available at papers. ssrn/sol3/DataIntegrityNotice. cfmabid2367462 . 131 Larry Harris, Maker-Taker Pricing Effects on Market Quotations . (Nov. 14, 2013)(noting that evidence thus strongly suggests that maker-taker pricing indeed has affected average bid-ask spreads and average quotation sizes for stocks often trading at one-tick spreads.), available at www. management. tau. ac. il/Eng/Uploads/dbsAttachedFiles/Maker. pdf. 132 James J. Angel, Lawrence E. Harris, and Chester S. Spatt, Equity Trading in the 21st Century: An Update, 27-28 (June 21, 2013), available at www. q-group. org/wp-content/uploads/2014/01/Equity-Trading-in-the-21st-Century-An-Update-FINAL1.pdf. Professors Angel, Harris and Spatt provide the following example of how maker-taker distorts the real spread: For example, in a 0.3 cent access-fee world where the displayed bid price is 10.00, the true bid price is 9.997 because the marketable sell order will receive not the 10.00 displayed bid price, but the displayed bid price less the 0.3 cent access fee. Likewise, where the displayed offer price is 10.01, the true offer price is 10.013 as a marketable buy order has to pay the 10.01 offer plus the 0.3 cent access fee. 133 Joe Ratterman, Time to take a break from maker-taker. The Trade (Feb. 5, 2015)(citing Citadel CEO Griffin as saying that banning exchange rebates would dampen competition, weaken liquidity incentives and, ultimately, widen spreads. ), available at www. thetradenews/news/AssetClasses/Equities/Timetotakeabreakfrommaker-taker. aspx . 135 CFA Institute, Dark Pools, Internalization, and Equity Market Quality . 16 (Internalization is also thought to account for almost 100 of all retail marketable order flow, whereby brokerages route marketable retail orders to a wholesale OTC market maker), available at www. cfapubs. org/doi/pdf/10.2469/ccb. v2012.n5.1 . 136 Lawrence Harris, Trading and Exchanges: Market Microstructure for Practitioners . 515 (2003)(noting that internalizers and OTC market makers fill marketable orders at the national best bid or offer, and that, to attract order flow, some OTC market makers guarantee to brokers that they will always fill orders at the NBBO up to a specified maximum size, regardless of the size displayed in the market.). 138 Exchanges are required to offer the same prices to all of their members. ATSs, by contrast, can offer different prices to different customers. See Joe Ratterman, Time to take a break from maker-taker . The Trade (Feb. 5, 2015), available at www. thetradenews/news/AssetClasses/Equities/Timetotakeabreakfrommaker-taker. aspx . 139 The New York Stock Exchange operates three equities exchanges: NYSE, NYSE ARCA, and NYST MKT. See NYSE Markets Overview, (May 6, 2015), available at www. nyse/index. Nasdaq also operates three equity exchanges in the United States: Nasdaq, Nasdaq PSX, and Nasdaq BX. See Nasdaq, Transactions, Trading, Equities (May 6, 2015), available at www. nasdaqomx/transactions/trading/equities. BATS operates four equity exchanges: BZX, BZY, EDGX, and EDGA. See BATS, About the BATS Exchanges, (May 6, 2015), available at www. batstrading/about/ . 140 See Shawn M. ODonoghue, The Effect of Maker-Taker Fees on Investor Order Choice and Execution Quality in U. S. Stock Markets . 41 (Jan. 23, 2015)(showing the maker-taker or taker-maker pricing models implemented by each exchange), available at people. stern. nyu. edu/jhasbrou/SternMicroMtg/SternMicroMtg2015/Papers/MakerTakerODonoghue. pdf . 143 A prisoners dilemma is a paradox in decision analysis in which two individuals acting in their own best interest pursue a course of action that does not result in the ideal outcome. The typical prisoners dilemma is set up in such a way that both parties choose to protect themselves at the expense of the other participant. As a result of following a purely logical thought process to help oneself, both participants find themselves in a worse state than if they had cooperated with each other in the decision-making process. Investopedia, available at www. investopedia/terms/p/prisoners-dilemma. asp . 144 Encyclopaedia Britannica, Collective action problem . (noting that the simple, one-shot prisoners dilemma game represents a series of more complex situations, where individual rational action leads to a suboptimal outcome. It would be in the interests of both players to cooperate, but they end up not cooperating because they can see the advantages of free riding and fear the dangers of being taken for a ride.), available at www. britannica/EBchecked/topic/1917157/collective-action-problem . 146 Dave Michaels, Trading Rebates Skew Markets, NYSE and Allies Tell SEC . BloombergBusiness (Feb. 21, 2014)(noting that a group of about 15 industry executives. met with members of the Securities and Exchange Commission in February 2014, and asked commissioners to conduct a pilot program to test whether stocks would trade differently without the maker-taker pricing model, available at www. bloomberg/news/articles/2014-02-21/trading-rebates-skew-markets-nyse-and-allies-tell-sec . 147 Letter from Joe Ratterman, Chief Executive, BATS, to Brent Fields, Secretary, U. S. Securities and Exchange Commission, 2 (Jan. 21, 2005)(petitioning the Commission for rulemaking including, inter alia . tiered access fees starting at 0.0005 (5 cents per hundred shares) for the most liquid securities.), available at www. sec. gov/rules/petitions/2015/petn4-680.pdf . 149 A trade-at rule would prohibit any trading center from executing a trade at the price of the NBBO unless the trading center was displaying that price at the time it received the incoming contra-side order. Under this type of rule, for example, a trading center that was not displaying the NBBO at the time it received an incoming marketable order could either: (1) execute the order with significant price improvement (such as the minimum allowable quoting increment (generally one cent)) or (2) route ISOs to full displayed size of NBBO quotations and then execute the balance of the order at the NBBO price. Securities Exchange Act Release No. 61358, Concept Release on Equity Market Structure, 70-71 (Jan. 14, 2010), available at www. sec. gov/rules/concept/2010/34-61358.pdf . 150 Nasdaq primarily lost market share to NYSEs Arca exchange, but BATS and Edge X also benefitted from Nasdaqs pilot program. Gary Stone, Two Weeks Into the Market Structure Experiment Results are Mixed . Bloomberg Tradebook (Feb. 19, 2015), available at www. bloombergtradebook/blog/two-weeks-experiment/ . 151 Philip Pearson, NASDAQ Pilot Program A Race to Zero (Market Share) . ITG (Mar. 5, 2014)(noting that Nasdaqs loss of market share upon lowering its rebates demonstrates how price sensitive some market participants have become.), available at www. itg/marketing/ITGReportPearson20150309.pdf . 152 Gary Stone, Two Weeks Into the Market Structure Experiment Results are Mixed . Bloomberg Tradebook (Feb. 19, 2015)(noting that Nasdaqs pilot is not a test to see if a Trade-At rule sic needed, but rather is only a test of what happens to market share and whether or not there is a prisoners dilemma. In other words the SEC has created a situation with the access fee caps and they need to intervene adjust the rebate cap in order to solve it. Only an expansion of Nasdaqs experiment applying it to all exchanges would be able to prove if a complicated Trade-At rule is necessary. In our opinion, lowering the access fee cap should be a first step (a simple first step) before instituting Trade-At.), available at www. bloombergtradebook/blog/two-weeks-experiment/ . 153 See Daniel Weaver, The Trade-At Rule, Internalization, and Market Quality . 3, 27-29 (Apr. 17, 2014)(explaining that except for a few exceptions, I find strong support for the existence of a negative relationship between the degree of internalization and market quality. In particular, for all three market segments internalization is associated with wider percentage spreads for that firm.), available at kortrading/wp-content/uploads/2014/03/The-Trade-At-Rule-Internalization-and-Market-Quality. pdf . 154 The trade-at prohibition in the tick size pilot program will be of limited use because it is not coupled with a reduction of the exchanges access fees or the maker-taker rebates. 156 Sherree DeCovny, Rulers of Darkness . CFA Publications, (Jan./Feb. 2015(noting that, unlike in the United States, Canadas order execution rules permit full broker preferencing, and that five banks dominate the order flow in Canada, whereas order flow is dispersed among many participants in the United States), available at www. cfapubs. org/doi/pdf/10.2469/cfm. v26.n1.10 . 158 For example, one commenter suggested that Canadas trade-at rule was flawed because it only allows internalization if there is price improvement. This commenter urges the Commission to adopt the version of a trade-at rule suggested in the Commissions 2010 Concept Release on Equity Market Structure, which does not require price improvement for the internalization of retail orders as long as the internalizer is displaying quotes. Daniel Weaver, The Trade-At Rule, Internalization, and Market Quality . 29-29 (Apr. 17, 2014), available at kortrading/wp-content/uploads/2014/03/The-Trade-At-Rule-Internalization-and-Market-Quality. pdf . 159 Further, the Commission should use this pilot to study whether, as some have claimed, a trade-at rule would harm retail investors because it will force their trades onto the lit exchanges, where they could fall victim to high frequency traders electronic front running strategies. See Letter from Chris Nagy, TD Ameritrade, to Elizabeth M. Murphy, U. S. Securities and Exchange Commission (Apr. 21, 2010), available at www. sec. gov/comments/s7-02-10/s70210-124.pdf. This may be a specious claim, as the electronic front running strategy appears to succeed only with regard to large, institutional-size orders that are broken into smaller, child orders and sent to different exchanges. See Merritt B. Fox, Lawrence R. Glosten, and Gabriel V. Rauterberg , The New Stock Market: Sense and Nonsense . 3 (Mar. 17, 2015), available at papers. ssrn/sol3/papers. cfmabstractid2580002ampdownloadyes . 161 See Letter from Chris Nagy, TD Ameritrade, to Elizabeth M. Murphy, U. S. Securities and Exchange Commission (Apr. 21, 2010), available at www. sec. gov/comments/s7-02-10/s70210-124.pdf . 163 James J. Angel, Lawrence E. Harris, and Chester S. Spatt , Equity Trading in the 21st Century: An Update . 5 (June 21, 2013), available at www. q-group. org/wp-content/uploads/2014/01/Equity-Trading-in-the-21st-Century-An-Update-FINAL1.pdf Letter from Chris Nagy, TD Ameritrade, to Elizabeth M. Murphy, U. S. Securities and Exchange Commission (Apr. 21, 2010), available at www. sec. gov/comments/s7-02-10/s70210-124.pdf . 164 See, e. g. . Testimony of Erik R. Sirri, Professor of Finance, Babson College, before the House Subcommittee on Capital Markets and Government Sponsored Enterprises, (Feb. 28, 2014)(Existing interpretations of the duties of best execution, however, have not have kept pace with the changes in market structure and with automated trading.), available at 1.usa. gov/1o6nUXW . 165 Letter from Chris Nagy, TD Ameritrade, to Elizabeth M. Murphy, U. S. Securities and Exchange Commission (Apr. 21, 2010), available at www. sec. gov/comments/s7-02-10/s70210-124.pdf . 167 Letter from Chris Nagy, TD Ameritrade, to Elizabeth M. Murphy, U. S. Securities and Exchange Commission (Apr. 21, 2010), available at www. sec. gov/comments/s7-02-10/s70210-124.pdf . 168 See, e. g. . Letter from Senator Carl Levin to the Honorable Mary Jo White, Chair, U. S. Securities and Exchange Commission (July 9, 2014), 2-3 (noting that the fractions of a cent received by retail brokers per-share under the payment for order flow regime add up to a multi-million dollar conflict of interest.), available at webcache. googleusercontent/searchqcache:4KNv5xlR5HMJ:www. hsgac. senate. gov/download/levin-letter-to-sec-chairman-mary-jo-white-re-equity-market-structure-july-152014ampcd5amphlenampctclnkampglus. Reportedly, TD Ameritrade earned 236 million in revenue from maker-taker fees and payments for order flow in 2013, and it has been estimated that ETrade and Charles Schwab each earn 92.5 million and 100 million from these fees, respectively, each year. Bradley Hope, Fallout From High frequency Trading Hits Brokerages, The Wall Street Journal, April 6, 2014, on. wsj/XxJGtt . 170 See Thomas Peterffy, Chairman and CEO of Interactive Brokers Group, Comments Before the 2010 General Assembly of the World Federation of Exchanges, 1 (Oct. 11, 2010), available at www. interactivebrokers/download/worldFederationOfExchanges. pdf . 171 Findings Regarding The Market Events of May 6, 2010 . Report of The Staffs of The CFTC and SEC To The Joint Advisory Committee On Emerging Regulatory Issues (Sept. 30, 2010), 58-62, available at www. sec. gov/news/studies/2010/marketevents-report. pdf . 172 Letter from Larry Tabb, Founder amp CEO, TABB Group, to The Honorable Carl Levin, U. S. Senator and Chairman, Permanent Subcommittee on Investigations, dated Aug. 11, 2014 (noting that payment for order flow allows brokers to reduce retail commissions, invest in better client-facing technology, and provide a better customer-facing environment, and that, if retail investors marketable orders are routed directly to exchanges, those orders likely will trade at either the best bid or offer, forcing the retail investor (using a market order) to receive the least and or pay the most. ), available at www. tradersmagazine/news/viewpoints/tabb-group-ceo-writes-levin-disagrees-on-ban-of-payment-for-order-flow-112785-1zkPrintabletrue James J. Angel, Lawrence E. Harris, and Chester S. Spatt, Equity Trading in the 21st Century: An Update, 8 (June 21, 2013), available at www. q-group. org/wp-content/uploads/2014/01/Equity-Trading-in-the-21st-Century-An-Update-FINAL1.pdf . 173 Sherree DeCovny, Rulers of Darkness . CFA Publications, (Jan./Feb. 2015)(quoting Paul Jiganti, managing director and head of investor advocacy at TD Ameritrade, as saying that, by selling retail orders to OTC market makers, TD Ameritrade gets about 4.5 times whats displayed on average for our retail clients at a price thats better than the marketplace over 90 of the time.), available at www. cfapubs. org/doi/pdf/10.2469/cfm. v26.n1.10 . 174 See Thomas Peterffy, Chairman and CEO of Interactive Brokers Group, Comments Before the 2010 General Assembly of the World Federation of Exchanges, 1 (Oct. 11, 2010), available at www. interactivebrokers/download/worldFederationOfExchanges. pdf. see also See Interactive Brokers, Best Price Execution - IBs SmartRouting Advantage Delivering Best Price Execution for Eight Straight Years, (May 4, 2015), available at www. interactivebrokers/en/indexf1685ampnsT . 175 Interactive Brokers indicates that this analysis is based on independent measurements by the Transaction Auditing Group, Inc. (TAG), a third-party provider of transaction analysis. Interactive Brokers, Best Price Execution - IBs SmartRouting Advantage Delivering Best Price Execution for Eight Straight Years . (May 4, 2015), available at www. interactivebrokers/en/indexf1685ampnsT . 176 See Interactive Brokers, Best Price Execution - IBs SmartRouting Advantage Delivering Best Price Execution for Eight Straight Years . (May 4, 2015), available at www. interactivebrokers/en/indexf1685ampnsT . 177 Securities Exchange Act Release No. 74892, Order Approving the National Market System Plan to Implement a Tick Size Pilot Program . (May 6, 2015), available at www. sec. gov/rules/sro/nms/2015/34-74892.pdf . 178 See Letter from Thomas Peterffy, Chairman of Interactive Brokers Group, to Stephen Luparello, U. S. Securities and Exchange Commission (Aug. 1, 2014), available at www. interactivebrokers/download/executionstatscommentletter. pdf . 180 Financial Conduct Authority, Best execution and payment for order flow, (July 2014)(noting that most firms are not doing enough to deliver best execution through adequate management focus, front-office business practices or supporting controls.), available at www. fca. org. uk/static/documents/thematic-reviews/tr14-13.pdf . 181 Recommendations Regarding Regulatory Responses To The Market Events of May 6, 2010, Summary Report of the Joint CFTC-SEC Advisory Committee on Emerging Regulatory Issues, 10-11, available at www. sec. gov/spotlight/sec-cftcjointcommittee/021811-report. pdf .
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