DOJ Comments On SEC Market Structure Proposals

The Department of Justice’s Antitrust Division wrote a comment letter on Tuesday to the Securities and Exchange Commission warning of possible negative interactions between the four market structure rules proposed in December.

The comment period for the SEC’s market structure reforms officially ended on March 31.

The four market structure proposals would require broker/dealers to disclose order execution quality (Rule 605), require wholesalers to conduct auctions for certain retail orders (order competition rule), take over enforcement of Regulation Best Execution from FINRA and reduce tick-sizes for national market exchanges.

The DOJ praised the efforts of the SEC to promote competition, which all four proposals seek to do. The letter noted that competitive auctions would promote transparency and competition for retail orders and that tick-size reductions would help slower traders at exchanges.

The Antitrust Division also cautioned the SEC against implementing all of these changes at once, since they could interfere with one another. This is a common criticism of these proposals, but the DOJ’s letter included examples of hypothetical interactions.

The DOJ said tick-size reductions for exchanges could move order volume from wholesalers to exchanges, which would then reduce the number of orders that are 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.

In short, the DOJ encouraged the SEC to be sure that, when taken together rather than in isolation, these proposals promote competition.

Many other actors have recommended that the SEC implement these rules sequentially, if at all, including JP Morgan and Vanguard.

Vanguard expressed strong support for the Rule 605 proposal, perhaps the least controversial of the four, and said it should be prioritized. This change would empower investors to find the best execution for their trades, since brokers would have to disclose their order execution quality publicly.

JP Morgan concurred and said Rule 605 and tick-size changes should be implemented first, with Reg BE implemented later when the impacts of the first two are more established. JP Morgan urged the SEC to abandon the auction proposal because, “It will negatively impact security prices for our clients” by slowing down the trading process long enough for others to notice an increase in demand and increase the price in response. In not accounting for this, the SEC overestimates the benefits to retail traders from the order competition rule, the firm commented.