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Market Regulation

Trends in the SEC Comment Letters

Back in December, the U.S. Securities and Exchange Commission (SEC) launched four new rules affecting trading in U.S. markets. You can read our data-driven summary of the new rules here and see some analysis we have done on their tick proposal here and here, as well as access fees here

Today we take a look at trends across the majority of other large institutions' comment letters.  

Although few agree with all that the SEC has proposed, there are areas of broad agreement, including: 

  • Reducing tick size for truly tick-constrained stocks 
  • Acceleration of smaller round lots 
  • The new 605 rule 

There is a surprisingly mixed reaction to the changes to access fees in the proposal, ranging from reducing explicit transaction fees at all costs to significant concerns about the impact of dramatic reductions of rebates on the NBBO across the market, especially for thinly traded stocks. 

In fact, even for the least popular proposals (best ex and retail auctions), there are nuances in what comment letters actually say, which are not as overwhelmingly negative as a first read seems. 

We included 85 of the most significant industry commenters 

Although there are thousands of comments across all four of the new rules, we have focused here on the 85 commenters that represent a majority of large trading and investing participants. Our data includes buy side, sell side, exchanges and market makers, as well as industry groups and academics. 

Each firm is included only once – so we exercised judgment when allocating (say) a retail broker-dealer with a large fund management business – or a hedge fund that is also a market maker. 

We show in heatmaps letters that support (green), support with modifications (blue) and oppose (red), as well as those that had no comment (grey). In a few cases, we excluded letters that were unclear on a topic or added additional colors to the heatmap to address nuances. 

Chart 1: The 85 commenters in our data come from across the market 

The 85 commenters in our data come from across the market

Trends for the new trading rules 

New NMS rules cover tick sizes, access fees, odd lots and round lots. However, industry views on each of those topics vary across participants and sometimes support switches to opposition at a specific level. 

Chart 2: Industry is in favor of getting ticks closer to “right” for the spread each stock trades at 

Industry is in favor of getting ticks closer to “right” for the spread each stock trades at

Looking at the detailed comments on tick size at a high level suggests most oppose. However, a deeper dive shows there is overwhelming opposition to: 

  • 1/10th and 1/5th cent ticks. 
  • Too many ticks in each spread, with many preferring a multifactor approach to reduce the ticks of only truly tick-constrained stocks. 

But there’s general support for creating “right-ticked” stocks, and there are three considerations to take into account: 

  • Too many ticks: A majority say 20mil and 10mil ticks are too small for now, and stocks should not have 4-8 tick spreads (see data on this here). 
  • Too many stocks in the tick buckets: A majority favor reducing ticks only for those truly tick-constrained stocks to a half-cent as a start, with analysis of the data after that. 
  • One-sided fix: If the industry thinks too many ticks are not ideal when reducing tick sizes, then it should also look at stocks with too many ticks (which should then have ticks wider than 1 cent). 

Chart 3: There is support for rebates to ensure NBBO remains competitive 

There is support for rebates to ensure NBBO remains competitive

Many realize that the old 30mil access fees won’t work with new smaller ticks. Even a 50mil (1/2 cent) tick could have economically crossed markets at a 1-tick spread (2 x 30mils fees > 50mils spread). 

Some net-takers of liquidity (who pay access fees) understandably would like to see access fees simply “lower” (mostly the green color).  

However, that will create a trade-off, where lower rebates may lead to a wider and shallower NBBO, resulting in spreads costing even more than the access fee savings. To address that more equitably, a number of comments suggest a proportional access fee (proportional to the tick, which itself should be proportional to the spread). A number suggested 30% of the new (in their mind optimal, noting Chart 2) ticks. 

Economically, because the tick-constrained stocks tend to have the highest access fee costs (in basis points), a proportional reduction for those stocks alone would still significantly reduce total fees and rebates paid by takers in the industry. However, importantly, it would still leave a reward for competitive quoting, especially in wider spread and less liquid stocks. 

Chart 4: Industry’s view on the tick size harmonization proposal is complicated by other factors 

Industry’s view on the tick size harmonization proposal is complicated by other factors

Surprisingly, given the general support on “fixing” ticks (so they result in more consistent depth and spreads), it’s interesting that there was less support for aligning to the same ticks for quoting and trading. 

Perhaps that’s not surprising. Even the SEC’s auction proposal sets retail ticks differently from institutional ticks, which arguably makes it harder for institutional algos to send orders into retail auctions in order to trade with retail liquidity. 

But also, larger traders are clearly concerned about NBBO depth becoming much smaller than it is now. For many larger investors, the trade-off between spreads and depth is worth reconsidering. In short, smaller spreads lead to lower depth. That, in turn, will make it more difficult to post liquidity or complete large orders without signaling. 

This concern is consistent with the objection to too many (micro) ticks for all stocks (Chart 2), which we know will also increase message traffic and quote flicker. 

Chart 5: Industry is supportive of smaller round lots but not so much of odd lots bbo 

Industry is supportive of smaller round lots but not so much of odd lots bbo

Consistent with the mutual funds preference for actionable depth are different opinions of the proposed fast-tracking odd lot BBO and round lot rule changes: 

  • The majority support the new smaller round lots — remember these will reduce the odd lot problem while also ensuring the NBBO is worth at least $10,000. 
  • The inclusion of an odd lot BBO in the SIP is far less popular. 

What about the three other rules? 

Each of the remaining three rules has a more consistent mix of support and opposition. 

Chart 6: Industry’s view on the retail auction proposal 

Industry’s view on the retail auction proposal

The retail auction (order competition) rule has received a lot of negative press, and it’s true that a majority also oppose it. This proposal also has the lowest rate of no-comments among our sample. 

However, some commenters do “support” this proposal, especially in principle, although often with modifications to how this would or should work. 

In principle, many Mutual Funds would like a way to trade directly with retail — which seems to be the driver and a key economic benefit for this rule — but are concerned with signaling, delay and opportunity costs, as well as the practicalities of pricing to the attributed counterparties at even smaller ticks than on regular venues. 

Chart 7: Industry’s is mostly unsupportive of the best-ex proposal 

Industry’s is mostly unsupportive of the best-ex proposal

For those who commented, the best-ex proposal also has a significant level of opposition. Some commenters cited the complexity of overlapping best-ex rules; others suggested the rule is too prescriptive in what it requires or not broad enough in how “best ex” can be calculated. 

Those in favor of the rule are mostly academic and industry groups. 

Chart 8: Industry is mostly supportive of the 605 proposal 

Industry is mostly supportive of the 605 proposal

In contrast, the industry overwhelmingly supports the new 605 proposal, with very few objecting. 

What does this all mean? 

One consistent takeaway from many comments is that this all looks like a lot of large changes all at once, with the potential for unintended consequences and new costs for investors. 

It's also true that these charts (necessarily) generalize some pretty nuanced positions. 

Many suggest a more incremental approach, with measurements of costs and benefits, perhaps with pilot stocks first to ensure we do no harm to U.S. markets and their attraction to investors and companies from around the world. 

Although almost all of the industry disagrees with some parts of all these rules, there are places where comments and concerns align, and cost benefits are clearer.  

Time will tell what impact this has on the final rules we might see. 

Phil Mackintosh


Phil Mackintosh is Chief Economist and a Senior Vice President at Nasdaq. His team is responsible for a variety of projects and initiatives in the U.S. and Europe to improve market structure, encourage capital formation and enhance trading efficiency. 

Read Phil's Bio