In this statement, the Committee on Capital Markets Regulation (the “Committee”) describes the regulation and functioning of U.S. equity market structure with a focus on retail investors, and it sets forth policy recommendations that would provide additional transparency for retail investors and enhance competition among broker-dealers and exchanges.
First, we consider whether the SEC should implement a trade-at rule that would require certain orders to be executed only on exchanges by prohibiting off-exchange trading at the same price that is otherwise publicly available on a U.S. stock exchange. We conclude that the SEC should not implement a trade-at rule. We find that off-exchange trading is beneficial for institutional and retail investors and that trade-at rules reduce competition between market centers (including exchanges, alternative trading systems and wholesale broker-dealers) and have historically resulted in increased transaction costs for all investors. The SEC should therefore continue to allow trades to be executed at the market center where they receive best execution.
Second, we recommend that the SEC require that retail broker-dealers provide disclosures regarding trade execution quality to their customers, so that retail customers can evaluate and compare the execution quality provided by retail broker-dealers. This will further facilitate competition between retail broker-dealers over execution quality and ensure that the effects of payment for order flow arrangements on execution quality, if any, are disclosed to retail investors.
Third, we recommend that the SEC reduce the tick size for highly liquid stocks that trade at one penny spreads in all market conditions. A half penny tick size for such stocks would enhance competition between on-exchange and off-exchange trading and potentially reduce transaction costs for investors.
The full report is available here.