Equity Market Rule Changes Might be Overhauled by SEC This Year

The Securities and Exchange Commission announced in its Spring 2024 agenda, released earlier this month, that it intends to finalize its market structure proposals, initially proposed in December 2022, in October of this year. October is a goal set by the SEC and is not legally binding.

In December 2022, the SEC made four proposals to modify the market structure for equities. The first, finalized in March 2024, will require broker/dealers to disclose more data on the quality of their stock order executions, starting in 2026. The other three proposals are still pending final touches by the regulator and include: a rule that would reduce certain stock price increments to sub-penny amounts; a new best-execution standard enforced by the SEC; and a rule that would create mandatory auctions for wholesalers for retail stock orders.

The amendments to the finalized Rule 605, which requires greater quality of execution disclosures, received the most industry support of the four and passed the commission with a 5-0 vote.

The other three rules are more controversial. Feedback on the tick-size, or price increment proposal, which would allow some stocks to list their price in sub-penny increments on exchanges, received mixed feedback but had generally positive response if the increments were half-penny ($.005). According to the SEC, it intends to “adopt variable minimum pricing increments for the quoting and trading of NMS stocks, reduce the access fee caps, and enhance the transparency of better priced orders.”

John Ramsay, the IEX’s chief market policy officer, says that “there seems to be a general expectation the SEC will move forward with those changes later this year.”

The other two proposals, intended to promote competition and transparency, are widely opposed by industry players, who argue they are cumbersome and unnecessary.

The auction proposal, or “order competition rule,” would prohibit wholesalers “from internally executing certain orders of individual investors at a price unless the orders are first exposed to competition at that price in a qualified auction operated by an open competition trading center.”

Ramsay says, “I think the assumption of most people is that the order competition rule is unlikely to be adopted soon and may not be adopted at all,” due to the pushback it has received, despite the October goal. Ramsay says, “One shouldn’t read too much into the October date,” because it is intended to signal action by the end of the year.

The last proposal would see the SEC take over enforcement of Reg BE, or best execution, from FINRA, which requires brokers to seek out the best possible execution quality for clients. According to the SEC, the rule “would enhance the existing regulatory framework concerning the duty of best execution by requiring detailed policies and procedures for all broker-dealers and more robust policies and procedures for broker-dealers engaging in certain conflicted transactions with retail customers.”

During the comment period, the Department of Justice warned the SEC against implementing all the proposals at the same time. The DOJ noted that these rules would interact in ways that could be hard to predict and could potentially conflict with each other.

For example, the DOJ argued that the tick-size reductions for exchanges could move orders from wholesalers to exchanges, which would then reduce the number of orders subject to auctions, since that rule only applies to wholesalers. Additionally, the SEC’s Reg BE proposal requires broker/dealers to consider the competition present in a market when executing an order, a process which would be influenced by the auctions now required of wholesalers.

The five commissioners of the SEC would have to vote on the proposals before they can be finalized.