August 13, 2024

Ms. Vanessa Countryman
Secretary
U.S. Securities and Exchange Commission
100 F Street NE
Washington, D.C. 20549-1090

Re: File No. S7-30-22; Regulation NMS: Minimum Pricing Increments, Access
Fees, and Transparency of Better Priced Orders
File No. S7-32-22; Regulation Best Execution
File No. S7-31-22; Order Competition Rule

Dear Ms. Countryman:

The Securities Industry and Financial Markets Association (“SIFMA”),¹ together with The Asset Management Group of the Securities Industry and Financial Markets Association (“SIFMA AMG”),² respectfully submit this supplemental comment letter to the U.S. Securities and Exchange Commission (the “Commission”) regarding the above-referenced outstanding equity market structure proposals (“EMS Proposals”)³ in light of the Commission’s adoption of amendments to Rule 605 in March 2024.4 As stated in SIFMA’s and SIFMA AMG’s initial comment letters on the EMS Proposals, we believe it is imperative for the Commission to analyze the state of execution quality using the updated Rule 605 statistics prior to adopting any changes to the current equity market structure.5

The Commission recently updated Rule 605 for the first time in more than 20 years. This decision (which SIFMA and SIFMA AMG supported) evidenced the Commission’s recognition that the information included in the prior disclosures provided under the rule was of limited utility due to significant changes in markets during that time, including “exponential” advances in trading speed.6 The Commission also recognized that the scope of broker-dealers required to report Rule 605 statistics was inadequate to monitor the routing decisions of order flow providers.

To address these gaps and make the disclosures more useful, Rule 605 now requires reports by a larger universe of broker-dealers, including large retail firms. Rule 605 also requires broker-dealers subject to the rule and market centers to disclose more granular information about the quality of executions across a wider variety of order sizes, order types, and time-to-execution categories. By making these updates, new Rule 605 is designed to give investors, market participants, and regulators a more meaningful and broader view of execution quality across such broker-dealers and market centers. As a result, Rule 605 will for the first time ever give the
Commission and the public the ability to see the outcome of retail broker-dealers’ routing decisions in clear, unambiguous, well-defined metrics. This is critical data to support the open question of whether any further market structure changes are even necessary.

The Commission has also stated that it believes the amendments to Rule 605 will “result in an increase in competition, which, in turn, is expected to improve order execution quality and price efficiency.”7 If additional variables are introduced prior to implementation of Rule 605, such as modified tick sizes, the mandatory routing of “segmented orders” to auctions under the proposed Order Competition Rule, or additional routing considerations under proposed Regulation Best Execution, it will not be possible to evaluate whether the amendments to Rule 605 had their intended effect, nor whether any of those changes were ever warranted. Moreover, the Commission expects all three of these other proposals to also impact execution quality.8 The improvements in execution quality and competition that the Commission anticipates arising from the amendments to Rule 605 may be sufficient to no longer necessitate one or more of these other rule proposals or may reveal that a different policy prescription is necessary to achieve the Commission’s objectives. The only way this can be determined is if the Commission reevaluated U.S. equity market structure with the benefit of updated Rule 605 information.

We therefore urge the Commission to wait until the updated Rule 605 execution quality statistics are available (at a minimum one year, and ideally two years) before deciding whether any of the market structure changes included in the EMS Proposals are necessary. This approach would be consistent with the Commission’s economic analyses in prior rulemakings, which compare potential rules to the then-current regulatory framework and corresponding market practices to form a baseline to assess the expected “benefits, costs, and effects on efficiency, competition, and capital formation” of the proposed rules.9 The adoption of new Rule 605 requirements since the Commission issued the EMS Proposals significantly alters the regulatory and market baseline the Commission assessed to support its economic analyses in the EMS Proposals.

Commission statements in adopting Rule 605 make it clear that the baseline has shifted since the economic analyses the Commission conducted in connection with the EMS Proposals. For example, the Commission’s proposed Regulation Best Execution would include heightened standards for so-called “conflicted transactions”10 based on the Commission’s stated belief that “a broker-dealer engaging in conflicted transactions for or with retail customers has an incentive to handle those orders in a manner that prioritizes its own interests over its customers’ interests.”11 However, in adopting the enhancements to Rule 605, the Commission stated that it expects that competition among broker-dealers to increase as a result of more useful and transparent execution quality information, making it less likely that broker-dealers will prioritize their own interests over customer interests in conflicted transactions.12 Essentially, some of the Commission’s purported reasons for the market structure reforms in the EMS Proposals may be addressed through updated Rule 605. Therefore, the Commission should evaluate the new Rule 605 data prior to moving ahead with any of the EMS Proposals.

1. SIFMA is the leading trade association for broker-dealers, investment banks and asset managers operating in the U.S. and global capital markets. On behalf of our industry’s one million employees, we advocate on legislation, regulation and business policy affecting retail and institutional investors, equity and fixed income markets and related products and services. We serve as an industry coordinating body to promote fair and orderly markets, informed regulatory compliance, and efficient market operations and resiliency. We also provide a forum for industry policy and professional development. SIFMA, with offices in New York and Washington, D.C., is the U.S. regional member of the Global Financial Markets Association (GFMA). [↩]
2. SIFMA AMG brings the asset management community together to provide views on U.S. and global policy and to create industry best practices. SIFMA AMG’s members represent U.S. and global asset management firms whose combined assets under management exceed $45 trillion. The clients of SIFMA AMG member firms include, among others, tens of millions of individual investors, registered investment companies, endowments, public and private pension funds, UCITS and private funds such as hedge funds and private equity funds. [↩]
3. Regulation NMS: Minimum Pricing Increments, Access Fees, and Transparency of Better Priced Orders, Release No. 34–96494 (Dec. 14, 2022), File No. S7–30–22, 87 FR 80266 (Dec. 29, 2022) (“Tick Size Proposal”); Order Competition Rule, Release No. 34-96495 (Dec. 14, 2022), File No. S7-31-22, 88 FR 128 (Jan. 3, 2023) (“OCR Proposal”); Regulation Best Execution, Release No. 34–96496 (Dec. 14, 2022), File No. S7–32–22, 88 FR 5440 (Jan. 27, 2023) (“Best Execution Proposal”). [↩]