MEMX Comments on SEC Market Structure Proposals

MEMX submitted comments to the SEC on Friday on two of the four equity market structure proposals published last December: “Regulation NMS 2.0” and the “Order Competition Rule.” If adopted, these rulemakings would impose the most impactful changes to U.S. equity market structure in almost two decades.

Unfortunately, not even the SEC can predict the impact of simultaneously making such interrelated and far-reaching changes, nor have they attempted to do so. “Move fast and break things” may be a good motto for a technology disruptor, but not for a regulatory agency charged with protecting millions of American investors. This is one reason MEMX has continuously advocated for incremental, data-driven reforms.

While key regulations should be updated to keep pace with evolution in the market—as MEMX has outlined in white papers included in our submission to the SEC—we have significant concerns with various portions of the proposals, including the impact on both retail and institutional investors.

The U.S. equity market is a complex and interconnected ecosystem, and we therefore encourage the SEC to tread carefully and consider the potential unintended consequences of these proposals on American investors.

Our comment letter recommends that the SEC:

1. “Expedite” round-lot reform and require that the exclusive securities information processors (“SIPs”) disseminate the best odd lot order;
2. Reduce the minimum increment to $0.005 in tick constrained NMS stocks with a time weighted average quoted spread (“TWAQS”) of $0.011 or less to narrow spreads, and increase the minimum increment to $0.02 for NMS stocks with a TWAQS of $0.06 or more to improve liquidity at the national best bid and offer (“NBBO”);
3. Lower the access fee cap in tick constrained NMS Stocks to $0.0015 to maintain the proportionality of access fees and tick sizes, and include auction fees within the scope of the rule to prevent competitive distortions that would otherwise result if listing exchanges were permitted to use auction fees to avoid a lower fee cap;
4. Abandon the overly-prescriptive Order Competition Rule, which would mandate the use of an untested market mechanism of the Commission’s own design with wide-ranging and unknown implications for execution quality, in favor of reforms that would promote innovation and competition in the U.S. equity market, such as the approval of MEMX’s retail midpoint liquidity program and generally allowing exchanges, alternative trading systems (“ATSs”), and other venues to accept, rank, display, and trade orders in segmented retail programs in a minimum increment of $0.001; and
5. Define “success,” including positive criteria such as improving spreads and negative criteria such as reducing liquidity, and phase in changes in a manner that allows the Commission to determine the impact that each change has had on market quality, with a process for undoing changes that do not meet the specified success criteria.

These recommendations would meaningfully improve U.S. equity market structure while promoting innovation and competition and mitigating potential adverse investor outcomes. They would also provide useful data that the SEC could use to evaluate any potential future changes to its rules, the first step in an ongoing dialogue to modernize our market regulations. We sincerely hope that the SEC considers these recommendations—and the many other comments it is sure to receive—as it finalizes its equity market structure rulemakings. The U.S. equity market is the strongest it has ever been, let’s not lose sight of that as we try to make it even better.