What to Make of 1656 Pages of SEC Proposed Market Structure Reforms

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METT KINAK: I do worry that the NBBO almost becomes less relevant for institutional traders as you create this cocktail of these proposals together.

PETER HAYNES: Hi. It's Peter. Just before we start our first podcast for 2023, episode 50 of our market structure podcast series, "Bid Out," I wanted to provide listeners with some thoughts after taping episode 50. We knew going in there was going to be a lot of material to cover, and sure enough the pod length ran to over an hour. Rather than cut off important dialogue or cut topics, I decided to let it run. And I think, as you'll hear, the end product gives listeners a lot of material to think about as we prepare to comment on the SEC's proposed market structure reforms. I'm told a few of my friends in the space that I'm finding myself the least critical person I know about the SEC's proposed reforms. And that's because I don't want to let the minutia get in the way of the big picture goal of the SEC to find a way for different types of market participants to interact without intermediation. However, I will admit that when taken in totality, and given that no one can accurately predict how all the rule proposals will fit together, I do share the concerns of our guests that the SEC might have bitten off too much all at once. I do love being the host of this podcast series because, selfishly, I get to write the questions, and often the material fits my own curiosities. That said, it is hard to stay in the host lane when I have personal views on the topics that we're discussing, especially in this particular episode. I tried my best to keep my mouth shut. But as I sat and listened, I realized there is one topic we don't discuss enough, and that is the relevance of the NBBO, or National Best Bid and Offer. For all intents and purposes, the current NBBO is relevant only for retail and for good reason. The SEC is suggesting improvements to NBBO by including odd lots and redefining board lots by share price. But where does this leave the institutional participant? After all, institutions use the existing NBBO for so many important purposes, including for mid-point determination and for trading benchmarks such as arrival price. You essentially have a one-size-fits-all NBBO that is not fit for institutional purpose. And even at 100 shares up, does that really and truly reflect true price discovery for institutions? Especially when it doesn't include hidden orders on exchange that my friend, Jenny [? Haviaras ?] from [? Cowan, ?] suggests represents as much as 22% of volume for high-priced stocks. Another aspect that's going to make the NBBO even worse for institution is fragmentation of liquidity across sub-penny pricing increments. For institutions, the NBBO is becoming like Brock Purdy of the San Francisco 49ers, the last pick of the 2022 draft, "Mr. Irrelevant." It is funny that about the only aspect of current market structure that was untouched by the SEC proposals was order protection. But how valuable is top-of-book order-only order protection in a sub-penny pricing increment world? It probably makes sense to put that on the table with all the other reforms proposed, and maybe while at it consider the Canadian model of full-depth price protection for visible orders. This is just some food for thought. Regardless, I hope the listener here enjoys the podcast and you learn as much as I did moderating three of North America's leading market structure experts. I hope you enjoy the episode. Welcome to episode 50 of TD Securities podcast series, "Bid Out," a market structure perspective from north of 49. I'm your host, Peter Haynes. And today, we've brought back some of our favorite guests from past shows to discuss the SEC's lengthy and very detailed proposals to reform equity trading in the US. From left to right on your dial, our first guest is Mett Kinak, head of equity trading at T. Rowe, followed by Jim Toes, president of the Security Traders Association. And finally, Doug Clark is head of equity product design for TMX Group and one of Canada's leading voices on equity market structure. Mett, Jim, and Doug, thanks for joining us today.

METT KINAK: Thanks for having us.

JIM TOES: Thanks for having us. Mhm.

DOUG CLARK: [INAUDIBLE]

PETER HAYNES: Before we get started, a quick reminder to our audience. This podcast is for informational purposes, and the views described in today's podcast are of the individuals and may or may not represent the views of their firm. And, of course, the content on this podcast should not be relied upon as investment, tax, or other advice. I'm going to double down on this disclaimer today, as all of us are trying to digest all the information from the SEC. And as such, I would put our views into the category of, quote unquote, evolving, for sure. So let me start by saying we will assume that if you, as the listener, have made it this far in this podcast, then you probably have a basic understanding of the four SEC proposals to change equity market structure. So we won't review the specifics of each of these proposals. Importantly, while the SEC's own economic analysis for each proposal is unique, all of the proposals are actually intertwined. So I don't think it makes any sense to necessarily treat each of them independently, even if that's how the SEC did its analysis. In fact, I'm pretty sure we'll discuss during the course of the next 45 minutes the lack of economic analysis of what-if scenarios across each of these different proposals is, I think, one of the biggest failures and biggest hurdles for the SEC to overcome, as it tries to reshape equity trading and convince participants this is the direction we should go in. For purposes of the discussion, there are four different proposals from the SEC. We're going to skip over the retail order disclosure document. We'll leave others to debate that. And instead, we're going to focus on tick sizes, access fees to order transparency, retail auctions, and best execution. So Jim, I'm going to start with you, and I'm going to start with an open-ended question for you, as president of the FCA. Critics of the SEC's reforms point to the fact that the US equity market is the deepest pool of liquidity in the world, and it works very well. The SEC believes it can work better. Who do you side with? And what do you think Chair Gensler and his staff are really trying to achieve with these reforms?

JIM TOES: Right. So thanks for having us on, Peter. So listen. I mean, obviously, at FCA we have a very diverse membership. And this obviously is a very complex set of proposals here, so it's kind of hard to start picking we're on this side or on that side on any particular one. However, what I will say is that we often find ourselves in the middle of a lot of debates on market structure, OK? So our approach in those situations is the first thing we try to do is we try to determine where is the common ground on what is working among various parties. Then we look for the situations where the various camps-- you know, do they agree that a problem exists, but disagree on the solution? And then, finally, do the other areas-- like, do the parties that we're talking about here don't even think that a problem even exists? OK. So as it pertains to these set of proposals here, I think both camps do agree that we have the deepest markets in the world and that we also always need to be looking to improve them, and not just for competitive reasons, but also because the US Congress in 1975 told the SEC when they mandated them to create a national market system, that they had a set of guiding principles that the SEC is required to review from time to time. So that's really what we're going through here. All right? So as we move more towards the middle here, I think, when we look at what are the issues that both camps agree that improvements are needed, that would provide a better marketplace for investors and that would also get us aligned with the mandates that Congress put forth, I think one example is improving the national best bidder offer, the NBBO. All right. There is broad consensus among multiple participants here of different business models that investors deserve to be provided with prices that truly reflect the liquidity landscape. Congress recognized this, and then charged the SEC with creating a national market system that would provide accurate and timely quotations. And while the NBBO is sufficient on the [INAUDIBLE] liquidity and information in between the NBBO that investors either don't see or don't have access to. All right? Now, while I think both camps agree with what I just said, how to fix it or how to improve this, that's where the disagreements are coming in. As we go further to the right here on the last one, there obviously are also areas within this proposal where the camps can't even agree that a problem exists, from either an investor experience perspective or an adherence to some congressional mandate. And then the example of that is the concept that we replace the existing bilateral agreements between order entry firms and wholesalers with an order-by-order competition regime for some portion of investors. So to be clear, what I'm talking about here-- I'm not even talking about the design of the auction proposal, I'm just talking about this concept of order-by-order competition versus what is going on here. So obviously, there's a lot of stake here, a lot for us to focus on. And hopefully, we can find some common ground and work towards some constructive solutions.

PETER HAYNES: Jim, if you're Chair Gensler and you're listening to the industry feedback-- and I know there's been some criticism that, generally speaking, the feeling is this particular administration isn't interested in listening to the industry. But if you were listening to the industry, how do you drown out all of the commercial feedback that you're getting? I can see even within your constituency you'll have different people within the STA answering questions based on their own commercial interests. If you're the SEC, how do you drown out all that noise to figure out what is the right thing to do?

JIM TOES: You know, you've got to look at data. You've got to look at anecdotal stories, empirical data on it. And listen. I think the people in DC, whether you're working at the SEC, FINRA, or even on the Hill, they really are used to people coming down there and talking their own books. Some of them actually prefer that you talk your own book, because at least they can just listen and get an understanding of exactly your business model and where your interests align on it. So they do have the ability to filter out people coming down there for their own self interests and then trying to come to a decision that is consistent with what Congress told them to do, and it also benefits the markets.

PETER HAYNES: When we talk about commercial interest, the reality is that one of our representatives on this call, Doug Clark, works for the TMX Group. And regardless of the outcome of these proposals, there is impact on the Canadian market. So Doug, if you can just talk a little bit about when the SEC proposed the transaction fee pilot a few years ago, Canadian regulators had followed suit right away with a made-in-Canada solution that was similar, but not identical to the US proposal. And we all know that the pilots did not see the light of day, thanks to court rulings. But there was clearly coordination needed between regulatory bodies in Canada and the United States. Of the various specific proposals on Gensler's agenda, which ones of these proposals do you think Canada needs to mimic or come up with similar made-in-Canada solutions?

DOUG CLARK: Yeah. It's a great question, Peter. First off, I would just say that back when the previous pilot was announced, the director of trading, Brett Redfearn, had done a lot of work in Canada and had very good relationships with the OSC. So he worked with the OSC and, quite frankly, with a number of in Canada, yourself included, to make sure that they understood the nature of the inter-list. And I think that that relationship isn't where it used to be. So the OSC seems to be a little bit behind the eight ball, as opposed to where they were in the past. And they're just getting these documents at the same time we are and grappling with 600 pages of reading. So that's a work in progress. And I'm sure they'll be watching the comment process and looking for where the lawsuits come and what's going on there. As far as the three proposals we're talking about today, bext ex, competition or auctions, and the ticks and fees, I think, on the best ex side, having worked on the sell side for the last 20 odd years, I would quite frankly say that the best ex that's going on at the dealers far surpasses the proposal that the SEC has put out. So nice of them to codify minimum standards. I don't know that the OSC needs to do it. If they do it, I don't think it's a big lift for industry to meet that, the idea of an annual meeting being the minimum requirement. Most dealers have at least a monthly meeting, and all the other requirements they far surpass. So no need there. No [INAUDIBLE] either way. On the auctions, because of the nature of the Canadian market where we don't have the wholesalers, we don't have the bilateral trading agreements, our markets all have fair access, whether they're [INAUDIBLE] TRFs-- ATS's, rather, or they're lid exchanges. So the auction doesn't make sense. Most of our retail trading ends up on exchange in inverted markets. They're north of 20% of the volume in the Canadian market, north of 15% of the value traded. So we don't have that 35% of the volume trading off exchange where the institutions, like the T. Rowes, aren't able to access it, where it's not being competed for on an order-by-order basis. We already have that, so no need to react to that. The one that we do have to react to is the tick size/the exchange fees. And that is going to be not just on the inter-listed names, but I think for competitive reasons we will probably have to do that on the names that are not inter-listed or dual listed, listed in both the Canadian and US markets. Because despite not being listed in the US, those names do trade fairly heavily in the OTC markets, particularly with the retail flow. So we'll have to be competitive there. The last point I'd make on this is the Canadian market has done some things on exchange fees over the recent years. In the US, the fee cap is at 30 mils. That's the same fee cap we have for names that are listed on both markets. But for non-inter-listed names, we moved our fee cap down to 17 mils a few years ago. When we did that, we didn't include inverted venues. We only made that cap on the classic maker-taker model, the idea being that you only pay a fee on an inverted venue by choice when you choose to post. But on a maker-taker, you're somewhat forced to take, if that's the only market that has the best available quote. So they were trying to protect from only when you were forced to take. The SEC hasn't done that in their proposal. So it'll be interesting to see if the comments come in around that, or if the OSC decides to change tack. There's been some staff changes at the Ontario Securities Commission, so it'd be interesting to see if they do change the fee rules for the exchanges, if they include inverteds going forward.

PETER HAYNES: So Doug, you raised a lot of really good points in there. And I want to just dig in a little bit on, when would be the right time for Canada to start work on its own proposals? Should we be waiting to see how things play out in the US? Because we're kind of at the mercy of the SEC. And I don't think the SEC is going to make any exceptions for the Canadian market or for inter-listed names. Should we be starting to work now? Or should we be waiting to see how things play out, what gets litigated, and then what ends up happening?

DOUG CLARK: Yeah. I can tell you that at TMX, we were sitting down over Christmas. We were sitting down this morning to talk about what our contingencies are. I think we have to do it. It's a bit of a frustrating process, because we all believe that there is going to be litigation and that there are going to be significant delays. But to the extent there's even a 5% or 10% chance that this gets passed in fairly short order, we can't be caught behind the eight ball. So I think we at least have to start those discussions and talk about what are the issues. And we'll get into some of them around traffic, or workflow, or some of the other issues that we're going to have to build through. We don't want to be seen napping on this.

PETER HAYNES: No. And I think that there's consensus, as we'll hear in this discussion today, that something's going to happen with tick increments. So we need to be on top of that issue. Something's going to happen with access fees. We need to be on top of that issue. One final question, before I just get into the details on these proposals with Mett. And I want to just ask you-- the definition of a board lot-- we call them board lots in Canada. For whatever reason, the US seems to use this term round lot. We'll just refer to that as synonymously, today, 100 shares of stock. Do you think Canada should adjust its round lot definition coincident with the change to round lot definition being proposed here today and has previously been proposed through the market data work that the SEC's been doing?

DOUG CLARK: Yeah. So the SEC is proposing to accelerate that change for stocks trading over $250. I think we have six names. I could be off by one or two on that. We don't have a lot of names, so it's not a big issue for us. I suspect we probably should follow suit. I think, overall in Canada, we have to take a look at board lots and odd lots for a number of reasons. They don't trade it seamlessly as they do in the US. And a lot of quant funds like to call me on a regular basis and remind me of that. But that's one that is fairly minor, just because of the lack of higher-priced stocks that we have in our market.

PETER HAYNES: Yeah. I'm not sure 250's the right demarcation point for the first reduction. That's something we'll be asking. I'll ask Mett in a little while. Just before I get to that, Mett, let's look at tick reform to start with as we dig in here. And I'm to understand that Chair Gensler mused about a one-size-fits-all tick reform that would have seen the minimum coding increment on exchanges fall from $0.01 today to 1/10 of a cent for all NMS securities. What we ended up with was tiered quote increments based on size of bid as spread, with the maximum equal to the current max of $0.01, rather than wider spreads for less liquid or high-priced stocks, like Doug was talking about a second ago. From a buy side perspective, Mett, how concerned are you about the liquidity fragmentation across price points in the lid order book when we end up with minimum tick increments of 2/10 of a cent or 1/10 of a cent?

METT KINAK: To answer you very quickly, very concerned. And I think when we look at all the proposals, this is the one that the institutional community is probably going to have the most commentary on and a lot of opinions around. Specifically, for us, I think, if you took the root of what the SEC was trying to do-- and we can all get behind the idea that there are securities that probably are tick-constrained-- but when we looked at the definition tick-constrained, we didn't just look at the spread of a security. We looked at the fact that there was true competition to tighten that spread further. And to us, that meant that there was obviously ample quoted volume on both sides of the spread. What the SEC had first proposed, obviously, I think would have been a catastrophic approach of taking every NMS security and applying a 1/10 of a penny increment to it. And I think they listened to some industry concerns around the one-size-fits-all. And what they ended up with is giving us a few sizes that fit smaller orders and not necessarily helping the institutional community with going the other side of the spectrum and potentially increasing spread-- or increasing ticks, I should say-- for securities that trade at much wider spreads. And what's frustrating for us is we were always told it's too confusing. Initially, when Chair Gensler had proposed the 1/10, the idea was to use more of an intelligent tick approach, a more thoughtful approach to ticks. And unfortunately, we were told that would be complicated for folks to understand, especially for self-directed individuals. They may not fully appreciate why certain securities traded certain increments. And then they went ahead and applied different varying bands anyway. So they've created the complication, without giving much help to the institutional community. So we're a little disappointed in that. And obviously, that will be one of our comments, that they should try to address the other end of the spectrum as well. And what I said was, a few sizes here. I think the problem they're trying to address, obviously, is how do you harmonize, how do you take some of this wholesaling activity and bring it on exchange, and then give retail the experience that they have now off exchange? And I guess folks at the SEC decided that the tighter the increment, the more, I guess, apples to apples that experience would be for retail consumers. Outside of that, I don't really have a good reason for why we're going to 1/10s and to 2/10. It seems rather arbitrary. Obviously, there's not data around the appropriate increment for certain stocks, because stocks don't trade at those increments currently. And so there's no way-- when I look at the economic analysis, and someone tells me that this is the right price level for this type of security, and that's the right price level for that security, I kind of scratch my head a little bit. I'm not sure I agree with that. I mean, even when you look at the third bucket in the tick increment, the suggestion is to take securities that normally trade between 1.6 cents and $0.04 and reduce their increment to 1/2 a penny. I think the market's already telling you that a penny seems reasonable for those securities, because they trade wider than a penny now most of the time, and in fact, multitudes of that at $0.03 and up to $0.04. So I'm not sure where these thresholds came from, where these numbers came from. But to us, there's a lot of concern. And the long-winded answer to your question-- I think we're concerned about, obviously, less top-of-book liquidity that would exist when you get too narrow in the increment. We're worried about more fading and flickering of quotes that's going to occur. We're worried about pennying and, obviously, sub-pennying in that instance, and a lot more message traffic, which may not sound like a lot for those that trade in an automated fashionns. But for humans, it's going to obviously make things a lot more complicated for us as we look at our screens. And I worry, personally, that the NBBO in the future-- I know Jim led off with we want a robust NBBO, and I totally agree with that. I don't think there's anyone in the industry that would disagree with that notion, but I do worry that the NBBO almost becomes less relevant for institutional traders, as you create this cocktail of these proposals together. And I can get into that a little further. But yeah, we're definitely concerned. And that'll be one of our comments to the SEC.

PETER HAYNES: I vowed before we started this we weren't going to go down rabbit holes. But the fact of the matter is the NBBO today is a retail NBBO, because it doesn't reflect institutional liquidity, demand, or supply. We all know that. And obviously institutions are all different sizes, as well. So that is a very, very complicated topic that I understand. 100 shares up 1/10 of a penny wide, when the real market should be $0.02 wide doesn't really make a lot of sense. But what I must say that I liked was I didn't mind the time-weighted average spread model, how they did that. I don't mind the fact we have multiple increments. I guess we can live with the complexity of that. Other market places, like Europe, have managed to live with that complexity. It's a matter of trying to calibrate it correctly, and I think that's where a lot of the industry concerns are. Doug, when we think about Canada, I always think about making sure that we don't put ourselves in the position with our rules that we somehow force flow on Canadian inter-listed names, or even non-inter-listed names, south of the border. So as we look at what tick increments we have here in Canada, one thing I would say is even if we created the exact same buckets as the US, but we had a security based on our liquidity analysis in Canada that was on a bucket with a wider minimum increment than the US, we would actually have to adopt the US increment to ensure we don't have flow routing south of the border. The nationalists in Canada-- I consider myself one of them-- don't really like the fact that we're at the mercy of the US market. But I can't come up with an alternative. What about you?

DOUG CLARK: Yeah. I think for us to have wider spreads-- and the inter-listed means that on most of the names that trade, our spreads are actually going to be tighter because they're going to be a Canadian penny, versus a US penny. But I think on those names we are going to have to go with their level. And I agree with you, we'd like to have some autonomy. But when you are living beside the elephant, you have to let them dictate the rules sometimes. Otherwise, you get squished.

PETER HAYNES: Yeah. And we don't want to get ourselves too wound up on that fact or do our own harm unnecessarily. So the aspect of quoting increments narrowing will also, according to the SEC, force a reduction in what they're determining as new access fee caps for trading, which today, as we all know, is $0.30 per 100 shares, or 30 mils. So the new increments, according to the SEC proposal, will be 5 mils for stocks that fit into that first bucket of 1/10 of a cent trading minimum Increment, and then 10 mils for stocks in the second bucket or any of the higher buckets. For these first two buckets, the narrowest two, this will mean that when rebates are taken into consideration, that markets could be locked when you include the rebate. How much of a concern should it be that we may potentially force locked markets by regulatory fiat?

DOUG CLARK: Yeah. I'm less worried about the locked. I think locked markets are dependent on rebates. And the rebates are going to be so small that, I think, that a lot of the rebate harvesting strategies are going to pull back. And I think that's maybe more the interesting challenge on the liquidity side. And at the risk of breaking the model here, I'm going to welcome Mett to react to this. But if you look at a stock right now that maybe has a $0.01 spread, is a $20 stock, and is typically 10,000 shares up, you take the rebates away-- and this was kind of what Redfearn and Clayton were thinking about a few years ago-- what happens? Do you end up with 60 mill spreads but the liquidity, even as you go out to the penny is no longer 10,000 shares? It's only 9,000 or it's only 7,000. It's only 3,000. How much of that flow is rebate-driven? And for a firm like T. Rowe, maybe it's OK if that volume disappears on the passive side, because it means Mett can get filled more passively, and he doesn't have as long a queue. But there are going to be other orders where he has liquidity, immediacy challenges, and he wants that flow to be there. I think it's going to be really interesting to see what happens in terms of the size of the quote, as well as the price fragmentation Mett was just talking about. And what I would love to have seen in the proposal is some definition of success. If the size of the quote goes from $10,000 a penny wide to $8,000, as you go out to the penny, but it's got a tighter spread, is that a win? I don't know, but it's always nice to go into these things defining success, not waiting till you see results and deciding whether you've defined it as successful or not.

METT KINAK: Yeah. I'll add to what Doug was just saying around the lack of, I guess, being able to measure things. I was a member of the Equity Market Sector Advisory Committee that the SEC had a few years back. I remember one of the committees I was on was around the transaction fee pilot. And we had proposed, obviously, reducing access fees pretty significantly in there. And I remember speaking to a lot of different folks, members on the committee, but also other market participants. The thought was, well, how do we know what the right level is? How can we arbitrarily pick a level and just set a fee for all securities? And it was a great question. So we proposed having different buckets and putting different types of securities into different access fee models and seeing what that did to liquidity. And the consistent message we got from all market participants was, we don't really know what's going to happen. And that included the exchanges, market makers, sell side, buy side. People genuinely had thoughts around, OK, is liquidity provision going to dry up on the access fees, and hence the rebate is reduced? Are more things going to trade on-exchange because the avoidance of that fee potentially goes away? Are market makers going to supply liquidity? Who knows? But we said, hey, that's why we need a pilot, and we need to distribute, obviously, pretty evenly to different types of securities into these buckets so that we can get some good data and really analyze it. Obviously, the courts didn't like that approach, and we weren't able to proceed with the transaction fee pilot. But I feel like that was a good way of approaching this. Again, going back to arbitrary figures, the one thing out of these proposals-- and they look very similar to what Chair Gensler has spoken about in June-- but I was surprised that they were as aggressive with the fee reduction as they were. That took me by surprise. I thought they'd at least, especially for the penny increment stocks, the ticks where they left, securities at a penny, I thought they'd leave the access fee at 30 mils as well. Obviously, they decided against that. Now, that introduces a lot of variables, one of which you talked about-- potentially locking markets in those smaller buckets. But again, on the other end of the spectrum, we're worried about liquidity provision for names where now you've taken, even for securities that may be $0.03 $0.04 wide, and you've really reduced the rebate, and the amount of that rebate, and what that incentive might be for postings. Again, from an institutional perspective, I think everyone would love the idea that we can post and be at the top of the queue. I can tell you now, institutions don't post that often. And I'm not sure that this environment, or the way that market is set up, that we could continually post and not impact the security, the price of the security. I think there's a lot of messaging that would be pretty obvious to sophisticated market participants, that there would be an institution. And unlike others who may be able to bid for some stock and then turn around and offer it, we don't generally do that. So we would continually be bidding for stock and watching, potentially, the stock go up. And so I'm not sure. People saying the queue lengths are shorter, and therefore we can get much more passive liquidity is a viable alternative for us. We are takers of liquidity, because our size dictates that we are going to be takers of liquidity. And our urgency dictates that we're going to be takers of liquidity. And my concern is that there's less liquidity to take from other market participants.

DOUG CLARK: If I can, Peter, the one thing I would just say to what Mett just said-- it's fascinating that he says, when they looked at the rebate pilot, they didn't know what everything what was going to come out of it. It was too complicated. We're sort of doing a rebate pilot, but we're also doing the auctions at the same time. So you're not only thinking that we're taking away the rebates, but now we're potentially sending retail flow to facilities where it can trade. So it just becomes that much more complicated. Just taking the fee change on its own, we don't know what's going to happen. You layer on the ticks and the order competition, there's nobody that knows.

METT KINAK: Yeah. And I think that's one of the main concerns, Doug, is that, how do you measure-- I mean, you mentioned, how do you measure success, potentially? Who determines the outcome being successful or not? Maybe you have wider ticks with less size. Is that a good thing? A bad thing? Who knows? But when you have this many variables with the tick changing, the fee changing, the round lot definition changing, add to that the order-by-order competition potential, I have no idea what's going to happen. And I'm not so sure it's to the benefit or the detriment of the market. And there's no way for us to triangulate exactly which one of these variables is causing said impact. And that's the bigger concern. Because if we do take the markets the way they are now and make them worse for institutional traders, what do we roll back? What would be the single point to say, OK, now do we go wider ticks, but keep the access fee where it is? Do we change the round lot definition? Do we get rid of this order-by-order competition? There's just too many variables in this equation. And frankly, I think it's overly complicated.

PETER HAYNES: Well, I think there's a consistent view about the complication here. But at the same time, I think we have to understand that regardless of whatever economic analysis the SEC does, it's going to be incomplete because of those unknown variables. I will say about access fees, the 30 mil cap, as I was told 15 or 20 years ago, was just pulled out of the air, because that was the highest level that was being charged at that point in time. So they kind of just guessed on that. And you can argue that they're guessing at 10 and 5. But at the end of the day, they have to put a number out there. They could come up with a round number, I don't know, as they have, but they are guessing. And I think we all agree with that, regardless of the economic analysis. Jim, that leads to the question-- I know your organization was out early on this particular topic-- and that is data. If we start trading in tenths of a cent, and we all of a sudden have spreads moving 1/10 of a cent, and we have quote flickering that's occurring at a parabolic increase, relative to what we have today, that's really going to cause a lot of strain on quote traffic. It's going to, one, make it more expensive for industry participants to consume, if they can at all. And two, it's probably going to result in exchanges that are going to increase, like Doug, the proprietary market data feeds, and partly, I'm sure, to recoup some of the costs associated with these new cloud storage arrangements that all the exchanges are putting in place. And they're not cheap. So as you dig in on this issue, Jim, as you guys have done early, what does it appear? Is it really a concern? And does it have some legs?

JIM TOES: Well, then, listen. I mean, when we look at the message traffic, before we even think about the cost to consume it or to store, the first thing we look at is, does it really pose any type of systemic risk to the overall system? The increase in quote traffic, does it make the algos act strange, the flickering quotes, especially at certain times of the day, like going into the close, and so on? So when we first looked at this-- and we're still looking at it, and unfortunately, we're looking at it more from the perspective of the auctions and how much message traffic would be generated with just a simple running of one auction today on a trade, versus how much message traffic gets done on that same trade in today's regime. Again, the multiples are pretty heavy on it. So listen, we do have concerns around the increase in message traffic on this thing. A good way, just for the industry, as far as how we traffic, how we're monitoring message traffic, FINRA CAT publishes their stats every month and every quarter. They're averaging 300 billion events per day that they capture on CAT. So every time there's a code change, that is a CAT-reportable event. With the way these auctions are set up where there's going to be an alert that goes out to participants, that is a CAT-reportable event. All the responses that come into that auction will be CAT-reportable. All the congratulations, you won the auction, and you 15 brokers did not win it, those are all messages that are going to have to be captured, because they're all going to be FINRA CAT-reportable events on it. So it's the sheer volume. Can we handle it? We haven't seen any estimates in the auction release, as of yet. I mean, we haven't seen it period, as far as estimates on message traffic. So that does give us some concern on it. And besides just the overall strain on it, too, we also look at it from the perspective of the ratio. Is it intelligent? Is it just stupid message traffic, for lack of a better term? I mean, we looked at quote ratios or quote updates to trades. When there's a trade, there's usually some type of economic benefit for one of the parties on it. So if you have a stock that has a low amount of quote updates per trade, you can generally state that that trade is going to cost less than a trade that has 10 times the quote changes for every trade that occurs, because those quote changes, obviously, have to be captured, stored, and whatever on it. So we look at it from the perspective of, is it posing any systemic risk to the system? And what does that traffic look like? Is it efficient, or is it inefficient? Is it putting undue costs or unnecessary costs on the one entity that's actually doing the transaction on it? And unfortunately, we don't have any estimates in the proposals that we've seen so far to give us any hope that they understand this.

PETER HAYNES: And let's just appreciate that, Jim Thank you. Mett, I want to just move on here to an area that's going to cause some confusion, and that's around this MDBO and the rabbit hole of exactly what the MDBO is. So right now, there's a new definition of a round lot as part of this proposal, which we've seen before. And as Doug mentioned earlier, the new round lot definition for stocks that trade over $250 is proposed to be 40 shares. And then it goes down to one share over a certain threshold in share price. However, odd lot orders that are less than this new round lot definition will now be published-- at least the best odd lot price-- will now be published as part of the MDBO, but not protected. So we have a new definition for round lots, which lowers it for certain stocks, depending on price. And for all stocks, we now have the best price that's an odd lot as part of the MDBO and, in theory, could be set in the MDBO, but not protected. I can think of a lot of problems with this model, including what prices now become references for midpoint trades. First of all, Mett, do you like the new round lot definitions? Should they be amended in any way? And what do you think we can do to fix the confusion that's going to exist around this new MDBO?

METT KINAK: Short answer, I hate them, the new round lots, that is.

PETER HAYNES: [LAUGHS]

METT KINAK: And I'll give you a little background as to why. Whenever I see these proposals, I always ask, why are we doing this? And I guess when the old administration, the prior administration had proposed this in the MDI, it was really to try and get more-- I don't know what you want to call it-- information and more reliable MDBO for those smaller orders where there was potential that, especially for higher-priced stocks, there was a much better quote within the spread that wasn't visible, obviously, to market participants, to self-directed individuals. And so they had proposed changing the definition of round lot. Now, my understanding is that the initial proposal was not to protect the round lots, as they were proposed, which I was in favor of. Because my whole theory around this is, I don't mind showing every market participant what the best quote is and letting them understand that, at 100, it's protected, and below that, it's not. And if you can see a quote. And if you don't access it, you should call your broker and figure out why they're not going to take that quote, period, and why they're not using that price. And if we're trying to sell for that, it's easier to do than to change the round lot definition. And the reason I don't like the new round lot definition is because, look, if you allow market participants to be able to get to a top of the queue with smaller size, they're certainly going to do that. We know we live in a technological arms race. And most market makers are not doing this sitting in front of a screen. There's automation that's taking place. And if you allow them to do it with 10 shares instead of 100 shares, they're certainly going to do that. That allows them to go to multiple venues. It creates more fragmentation, obviously. I'm probably much more inclined, as a market maker, to post at five different venues 10 shares of stock, than put 100 shares of stock up at five different venues because of fear of getting hit or taken on all of that. So to me, from an institutional perspective, I didn't like the way this was moving. Because like I said before, what is the value of the MDBO to an institution? And does it become even less valuable if the quote on either side is being driven by 1 or 10 shares? So I wasn't a fan of the protection. I've always been a fan of just letting all market participants see the quotes, putting them on the tape. People can see the odd lot sizes. It'd be easy for us to ignore them from an institutional perspective, if we didn't want to see them or interact with them. And obviously, retail can see them. And if their broker chooses not to interact with it, again, that's a best execution question to your broker. So yeah, do I think it leads to confusion? Absolutely. Do I think this whole thing-- again, going back to all the variables here-- leads to confusion? Absolutely. If you're a retail participant, you're going to have securities trading at different tick increments, that are protected at different lot sizes, that potentially may be traded in an auction, internalized, executed on exchange-- who knows at this point? And so yeah, I think it's going to lead to a lot of-- especially for self-directed individuals, it's going to be a difficult market for them to navigate at this point.

PETER HAYNES: I'm going to come back to the point I made earlier. We have a retail MDBO that is being used-- very, very importantly-- for the institutional community today, whether it's mid-point, dark pool trades, or whatever. It doesn't make a lot of sense the way it's designed. Even at 100 shares, it's that really reflective of where the market should be, call it the MDBO? So I don't really understand. I figure we need to find a new way of pricing midpoint trades for dark pools, or a better way for a true reflection of where midpoint is, and just let the MDBO go down to one share. And as you say, if they're not protected, then that's a broker issue. Why are you not achieving that price? Because you're not, for whatever reason, going to a marketplace for those, or just ignoring those quotes. So Mett, this is probably a good segue way to get into, really, I think the most controversial of all the proposals, and that is this new execution model for retail trades. So Chair Gensler wants to introduce what he calls order-by-order competition for retail trades. And to do so, in the model that has been proposed, he is essentially blowing up-- and these are my words-- the existing wholesaling model by adding so many rules to the process of internalization that the existing broker wholesaling arrangement is likely rendered moot. One of the concerns this raises is that retail activity in SMID names, or small and mid-cap names-- say we'll call it Russell Stock 2999-- will no longer have the backstop liquidity, as there is no need in the new model, with wholesaling relationships blown up for those wholesalers, to subsidize retail stock activity in small cap names at the expense of trading in the 500. Because I think we all agree that people trading in the 500 have to give up a bit of their deal in order to compensate the wholesalers, who are trading those small SMID names. Do you think, Mett, at the end of the day that, in this model, that Russell 299 name will see a wider bid-ask spread in the market as a result of wholesalers who are abandoning their quoting in this cap segment, because they no longer have to, as their wholesaling relationships have blown up?

METT KINAK: Yeah, this one's very complicated. So it's not an easy yes or no answer. I guess my concern on this one in particular is the attractiveness of trading in these less, I guess, liquid names-- as you call it, the Russell 2999. Obviously, from a T. Rowe perspective, we have a very large SMID franchise. And it benefits us when a lot of different market participants are engaged in those securities. And we'd love a good robust secondary market in small cap names. My concern is that from, again, a self-directed retail participant type of perspective, that trading in these names becomes less attractive because the outcomes are less predictable. And this goes back to your subsidize question around, right now, I can trade any name I want, up to 9,999 shares, as a self-directed individual, and get the same exact experience, generally. I know some of those securities go to the exchange. Some of the times, they're internalized. Some of them get price improvement, but generally, you're getting a very similar type of outcome. And so you don't really think about, is this a small cap? Is this a liquid name? Is this something that is in a meme frenzy at the moment? You kind of just plop in a ticker, and you get an experience. I worry in the future that, because there's no obligation for market makers to fill these more secondary, tertiary names, that they're going to pass on internalizing, obviously. They're going to worry about the liquidity within the auction of someone stepping up and filling that retail order. And therefore, what happens? What's the experience for that retail participant? Are they going through multiple levels in the book? What does the quote look like? Does the quote fade significantly, because everyone knows that the retail market participant's coming in? Do they have a really bad experience? And if so, do they just stop trading in these types of names? And do they lean more heavily into the Microsofts, Apples, and Amazons of the world, because they know 9 out of 10 times the experience is going to be this? And so that's, I guess, our biggest concern. And there's major downstream impacts, obviously. If you have self-directed individuals not interested in trading those names, obviously, as you mentioned, the subsidization that takes place potentially, if market makers are less interested in potentially trafficking in these names because they're not obligated to anymore from a retail perspective, does it just dry up all the market participation? Does it lead to just institution against institution-- which some people would argue would be good. But if we're all moving in the same direction, who's supplying the contraliquidity? And does it just make it very difficult? For an area that's already fairly difficult to trade, does it just make it even more difficult and even more costly, and therefore less advantageous for us to even invest in some of these small cap companies? That should be the number one concern of the SEC, by the way, is to make a capital markets where smaller companies can come in and mature to being mid and large cap companies. And if there is no incentive to trade these securities because the return isn't significant enough, the cost of getting in and out of the names is too significant, then they've done a very negative thing for markets, in my opinion. And that should be-- their motto is, do no harm. When I look at this proposal, I have concerns that they're going to harm small cap liquidity even further. And this isn't just the order-by-order competition, Peter. It also goes back to the rebates that they are shrinking in, potentially, these names, and incentivizing liquidity providers to be involved. So collectively, I am very concerned. And again, the SEC should really consider the tale here. I think a lot of times, when they're looking at these proposals, you're looking at what happens to the top 100 names. Yeah, does the participant, the retail participant, have a better experience in the top 100? Maybe. You could argue they're going to get, maybe, internalized at midpoint, or potentially get a better price in an auction than they would otherwise. But what happens to name 2999? And that's an area that, obviously, we're very concerned about.

PETER HAYNES: I feel like we're always trying to search for that unfindable small cap liquidity-- whether it's previous proposals the SEC has had that they've tried in the past due try to improve small cap liquidity, it just feels like it's a constant fight. Doug, I want to ask you a question about quote fade that Mett raised in that discussion we didn't really get into. We're all talking about these retail auctions, and again, we're making the assumption the listener understands how these auctions are working. But we've seen some situations in the past where you have information about the end-of-day auctions coming into the market, and the underlying securities are reacting to that end-of-day auction information as it comes in. In this case, we're going to be looking at auctions that are occurring in real time throughout the day. There's information in those auctions, albeit it is for retail size. My question for you is, is there a realistic concern here about quote fade and quote gaming during these auctions? And do you feel as though the time frame of 100 to 300 milliseconds is too short, too long, for broker algos and other tools to be able to react to?

DOUG CLARK: 100%, Peter. I do believe that there is going to be quote fading. And I think that the time frame is too long. I have talked to marketplaces putting up conditional orders in the past, and they'll come and they'll say, we're going to have it last 1/2 a second to a full second. And you just say, stop. A second is too short for a human to react, and it's miles too long for a [INAUDIBLE] situation to react. 100 milliseconds is way too long. If you think of a stock like Ford that trades actively-- and I just looked at yesterday's trading in Ford. Over the course of the day, it had on average 3 and 1/2 trades per second. In the first half hour of the day, it had 6 and 1/2 trades per second. If you get an active day in a name like that-- or god forbid, you get back to the AMC and the GameStop type activity-- and you get clustered trades where one retail broker is putting in for multiple accounts, you can have 20, 25 auctions running at one time on a given stock, if it's 100 milliseconds. If you get up to the 300 milliseconds, it could be a multiple of that. A, that's a lot of work for the various marketplaces running these to control that. You've got, say, 15 auctions going off for one stock. That's a lot for the various liquidity providers to handle. Are they really going to quote them all? And there's no need for it. The agency algos, maybe they can't react in 1 millisecond, but they certainly can in 5 or 10. So you limit the time. And also when you have that many orders, it's just more information for everybody that's going to be able to see the quotes. Everything's going to go to the consolidated feed. They're going to see there's a cluster of 20 orders trying to buy X-Y-Z, and they're going to take out the offer. And the SEC, in the document, they looked at what happened on actual match trades. So they looked at, within 100 milliseconds, how often did the quote move when a wholesaler printed a trade? A printed trade is very different than a stated order intent. You can trade off of somebody's intent. You can't trade off of a match trade. So the data behind that made no sense. I think that that's one of the bigger problems here. Just way too much time and way too much information is going to be resting in the market, particularly on the less-liquid names Mett was talking about earlier.

PETER HAYNES: So carrying on in the same theme, one of the rule proposals that's going to make it difficult for the wholesalers to continue to execute retail flow is this alignment of traded prices on and off exchange in the US. Today, you can trade at narrower increments in dark markets, versus what the requirements are in lit markets, which we've been talking about. Personally, I feel like this part of the proposal is a bit under the radar and actually could have some implications for institutional dark pool activity, in addition to the limits on providing what is now de minimis price improvement for retail. What do you think?

DOUG CLARK: Yeah, I agree. If you look at the stocks that have an average spread of greater than $0.04, you're going to have a tick of a penny. In the past, the wholesalers in the dark pools have been able to give price improvement of 1/10 of a penny, 1/4 of a cent, even 1/2 a cent. Now, they will be limited to giving that full penny price improvement or no price improvement. That's going to limit their flexibility. And if they can't give price improvement without giving the full tick-- which maybe doesn't make economic sense-- there's no price improvement. And then you get flow heading towards the lit exchanges on these less liquid names. And Mett's already talked about what happens if there's less incentive for the wholesalers to play these names and the retail gets a worse experience. Do they start to cluster back to the Teslas and the Amazons? I think taking this flexibility away is challenging.

JIM TOES: Two comments off of Doug and Mett's remarks. So one is that in both the writing in the proposal and also in conversations, the SEC has expressed a tolerance that there will be trade-offs for retail when they send orders into these auctions. That today they're used to getting the MDBO or maybe a little bit better, and that tomorrow, when these orders go into the auctions, they may not necessarily get the MDBO It may slide, and it may be a different experience. And they have demonstrated the tolerance for that type of a trade-off. They think overall, investors will come out better. The second part-- I think this is important. I know we don't want to get into the cost-benefit analysis here, but they have been throwing around this $1.5 to $1.8 billion that investors will get because of people like Mett coming into these auctions and paying midpoint, whereas maybe the order's only getting a sub-penny price improvement. I have hesitancy on that, that that's going to occur all the time. When you look at the data, they see how many times the orders come in. They know when there's an institutional buyer in the marketplace. And they just make the assumption that every time these segmented orders come in, that institution will take the other side at the midpoint. And I don't think that's necessarily going to be the case with the information leakage that, obviously, comes to the marketplace-- that an auction is going to be triggered. And people are going to know that if the stock does trade at the midpoint, that the other side of that liquidity provider was an institution. And I don't know if the institution's going to be willing to take that risk on 100, 200, 300-share orders.

PETER HAYNES: I think, Mett, you've expressed that reservation, that the idea that there's going to be as much institutional offsetting order flow all at mid, is a bit of a fallacy-- that if anything, institutions may provide liquidity against, contraliquidity to these auctions, but it wouldn't necessarily be at midpoint. It may be at touch or close to just slightly inside the market.

METT KINAK: Yeah, and I'm not opposed to providing liquidity at midpoint. I think, again, the names that we're trafficking in, that we're currently invested in, may not necessarily align with what retail is trafficking in. And therefore, the assumption that institutions are always going to be able to provide ample liquidity-- I mean, again, we're not making two-sided markets in 8,000 securities on any given day. We're trading probably 150 to 200 securities one direction, most of the time. And therefore, if we're there, and we have the opportunity to engage, we might. But there's no guarantee that we're always going to be the backstop for retail liquidity in an auction when market makers choose not to be there. And it's kind of funny. If everyone in the market-- think about how the idea is constructed. You can't ask-- I hope they don't ask retail brokers to have to manage these auctions themselves, as to where to route order flow. That's a major burden that you're asking, not just the larger retail brokers like Robinhood and Charles Schwab, but you know, you're going down the spectrum of even T. Rowe Price, who manages retail flow, albeit at a very small level, to now have to bear burden of sending order flow to an auction, maybe not getting it done, and then going to a wholesaler. So I assume that a lot of this activity will be directed by the wholesaler. So if that's the case, the wholesaler gets to determine whether or not they want to internalize something, whether or not they want to send it to an auction. Other market makers may or may not come in to supply liquidity. And then, who's left holding the bag-- institutions? Again, that goes to the point of, I'm not sure we always want to be the last line of defense to fill retail orders. That's not an attractive proposition for us either.

PETER HAYNES: No, and I don't think anybody is expecting the institutional community to change what they're trading, just in order to become the liquidity provider of last resort. I don't think even the SEC is expecting that to happen. So clearly, some trade-offs associated with this particular proposal, and one that is definitely a deep reach by the SEC in terms of how prescriptive it is. Jim, let's finish up on the final document in this series of SEC novels, and that's the one pertaining to Regulation Best Execution, or Rule 100, as it's being described. Your membership of broker-dealers are already subject to best execution obligations, as prescribed by FINRA rule 5310. What is your early take on the new SEC-proposed best ex rule? And for broker-dealers, is this simply going to mean double the work?

JIM TOES: Listen, I mean, let's talk about why they want to do it, why they want to have this. So they obviously want to have their own best execution rule, and it appears they want to have it so they can enforce investor protection rules across a range of asset classes that the Commission is currently either relying on other regulatory entities, such as FINRA, and in equities, or they're looking for a best execution rule across an asset class where one doesn't exist, such as like crypto. So the proposal itself, at first glance, I mean, it does-- it is principle-based. So in the areas where it does overlap with FINRA, like on equities or MSRB on munis, there does not appear to be any conflicts at this time on these rules. They can peacefully coexist with each other, because the FINRA rules and the MSRB rules on best ex are more clearly defined and fall within the guidelines that the SEC has here in the principles-based rule. So I don't think it's double work. However, where this can go sideways very quickly is that principle-based rules leave firms or broker-dealers more exposed than clearly-defined rules. So lawyers are broker-dealers. But they obviously like to have clearly-defined rules, because when it's a principle-based rule, it leaves room for interpretation-- different interpretations-- on the rule itself. And if a broker-dealer's interpretation differs from the regulator's, that's not the spot that you want to find yourself in here. And so even in a situation where a broker-dealer maybe adhering to a FINRA best execution rule, and that rule is within the guidelines of the SEC's best execution rule on equities, there is a chance that, in an SEC investigation, they may be able to fine a firm on certain behavior that could be left to be interpreted under the SEC's rule.

PETER HAYNES: FINRA Rule 5310 is a broker rule. However, the SEC also regulates asset managers, as well as the other asset classes that Jim was talking about earlier. Do you see any read-through to the buy side rule, SEC Rule 100?

METT KINAK: I've always thought that there's no such thing as a broker rule that doesn't apply to institutions. Even if you look at the order protection rule, most people wouldn't call that a institutional rule. But certainly, it obviously dictates where we can and can't trade. And so, again, the way it was written seems to allow for a little bit of policy and procedure approach, and therefore allows some flexibility for brokers to determine how to achieve that best execution. And they can have that conversation with their clients. Our concern is, obviously, that it gets overly prescriptive. And some of the higher, I guess, bars to achieving best execution that's, I guess, languaged in the proposal, if you're involved in principal activity, if you're involved, obviously, with PPOP arrangements, could get applied not just to retail activity, but to institutions as well. I mean, when you're looking at risk principal, that's obviously an area that institutions are actively involved in. So if you worry about internalization taking place in bilateral agreements that we have, our concern would be taking a retail-driven best execution, working it up to spectrum to an institutional type of best execution. I am surprised as well that, again, going back to the overall proposals, nothing too surprising, but the fact that it jumped into all these other asset classes, I didn't realize that the SEC had the authority to write rules around crypto best ex. I'm sure that's still being debated. But the fact that it's touching fixed income, the crypto space, and even options, from my understanding, I think it's a pretty significant proposal that people need to be aware of. And again, a lot of these things, if you go back to the proposal around getting rid of tiers-- and I won't go into too much detail on that-- it looks like a step forward to a bigger type of objective that the SEC has. And so we want to make sure that we're not led to something where we're comfortable with it the way it's proposed, and then the next derivative of it makes us very uncomfortable, potentially. So that's what we're worried about.

PETER HAYNES: I think there's a bit of a misnomer that tiers are being eliminated, too, Mett. As I understand it, you can look back to the previous month in terms of the tiering pricing, but you can also adjust your tiers throughout the month, which I believe is how it works in Europe at certain exchanges. So that might have been a little bit of a red herring on tiering. But I hear, certainly, what you're saying that-- and I've warned my colleagues in the fixed income world that they need to be prepared for what is now deemed to be best execution. And all I can think about, Mett, is some of our former friends from equity land that are now working for fixed income marketplaces who might start thinking, hey, we can create a club in fixed income, show best prices, and then start questioning why broker-dealers are not executing trades that are better prices that they should be able to see on their screens, and then take it from there. Therefore, you need to purchase our data. So I would worry, if I was in the fixed income world, that that's a direction that they're going to have to accept. Would you agree with me, Mett?

METT KINAK: Yeah, I would. And I would also add. even from an equity perspective, what you just said. Someone could create a club and show you that they're getting the best price. Well, best price for an institution, necessarily, is not best execution. That's an important thing that people need to determine. From a retail perspective, I totally understand that an individual that only has a couple of shares, or even a non-round lot to trade, wants to achieve the best price possible. From an institutional perspective, the best price isn't necessarily what drives us on each and every child order. We're looking at the parent order-level performance of our executions. And so it's difficult for a broker to say, look, when I'm trading for T. Rowe, I might be ignoring a good quote somewhere else, potentially, a midpoint execution opportunity somewhere else, because to me, that venue is toxic. When I interact with that quote, the quote changes. It obviously affects their parent-level performance, and therefore I avoid that venue. That's going to be difficult to do because while it might be beneficial for T. Rowe, maybe not for the next asset manager. And therefore, you might have to have policies with varying degree of clients that you have on what determines best execution. And I worry about the measurement of it as well. I mean, it's easy from a regulatory perspective to be able to look at the CAT and say, I can see a holistic 100% accurate view of the market at any given time of what's there, both hidden and displayed, and tell you whether or not you're achieving best execution. It's hard for a broker or anybody else to do that, because they don't get to see the full market the way it is at that point in time. You see the displayed market, sure. But you have no idea what's going on anywhere else. You don't know what's going to happen to the quote if you go and aggress a certain venue. And so it's a challenge. And I think it's one that leaves people in a very gray area. And that's one thing that I think, hopefully, people can recognize.

PETER HAYNES: It's clear to me from what you just said, Mett, that you're not off of your belief that we should get rid of OPR. If anything, it sounds like you're even more steadfast that that's something that should have changed. That's about the only thing that didn't get proposed here as part of the SEC's revisit of equity rules.

METT KINAK: It's the third wire, apparently, or the third rail, sorry. It's the live wire, the third rail, right? We can touch 610, we can touch 612, we can propose 615, but God forbid we get anywhere near 611.

PETER HAYNES: They just skipped over that one, exactly, because you don't want to step on it-- even though, arguably, you definitely want the market to step on that one. So Mett, I just want to just finish up here with some more general discussion around Washington. Some of the pundits locally suggest that Chair Gensler knows that some of these files will not survive legal challenge, as the courts will likely find the SEC went too far in its prescriptive rulemaking, and that may be specifically around how retail orders are handled. But some of these proposals could be traded away as long as his primary goal is achieved, and that is to really, at the end of the day, eliminate or blow up the retail-wholesale relationship. Do you agree that this is, in fact, Chair Gensler's primary goal? And if so, can you plot out a potential outcome that fits into the art of the possible?

METT KINAK: That's tough, right? That's like that's like asking, hey, if you can rewrite the 1,656 pages that they just proposed, how would you do it? Now, look, I think you're right in saying that there are probably two big objectives here that they're trying to address. One is payment for order flow and the wholesaling relationship, and two is just getting more liquidity onto lit markets. I think there's ways to do that that would be a little bit more palatable by the industry. Again, if you were to take back the core of what they're trying to solve for, some of it theoretically makes sense. There are tick-constrained stocks. Could we go ahead and address that and get a lot of advocacy from the marketplace? Absolutely. If you were to do it in a thoughtful way, to look at what really is defined as tick-constrained and address those stocks specifically, you can also potentially affect the access fee on those names. Again, we've always said the access fee creates a conflict of interest when it comes to routing, but really for the liquid names-- not so much for the illiquid names. And so when you look at the liquid names, you can bring that access fee down. We can get a lot of data around, are people incentivize to provide liquidity in those names still? Are they willing to trade those names? Would they trade them in lit or dark venues, if the dynamics were changed? So I think there's ways to approach this. This seems like-- this proposal, collectively, seems like a lot of ideas that are interconnected but don't make sense together-- that's how I would describe it-- because they have varying impacts to each other that are going to be very difficult for us to be able to assess whether or not they're beneficial or detrimental. So how I would do it is to take a simplified approach. If you want to introduce the odd lots to the tape, I think that would help, from self-directed individuals being able to see whether or not they are achieving the best price when they execute orders. I think you could, again, address tick-constrained stocks specifically. I think in those names, you can reduce the access fee. I don't think you'd get a lot of pushback in that area. I think that would give you a good data set around where the applicable tick should be, what happens to liquidity provision when the access fee is altered. Now, making a change to the wholesale market, I think you could do that from a best execution perspective and put the onus back on either the wholesaler or the broker itself to say, look, try, a free markets approach. So one of the things that I'm a little perplexed by is how prescriptive the SEC was on its order-by-order competition rule. And there are competing type of solutions-- I'll put out the Memex proposal out there-- where they came in and said, look, we'd love to supply what we would call retail-driven activity at midpoint and put out flags, and that was shot down by the SEC. Then they come in very prescriptively and say, no, do it this way. And so I'm surprised at how far reaching some of this is, but I think you could have taken market-driven solutions, like Memex and others, to say, hey, look, you have to check a few qualified venues before you can internalize. You could have put that into a best execution language a little bit more directly. So I think it's a sledgehammer approach, in my opinion. I don't know. Again, a lot of people I've talked to have said that this is a starting point to some of these proposals, and that they'll walk back some of them to make them a little bit more likable for the industry. I hope that's the case. I do worry, though, that we start from such a far perspective that we have to walk it back in so drastically. But we'll see. We'll see where we end up. But I think you could have taken a few simplified approaches and still achieved some of the things they're looking to achieve.

PETER HAYNES: So Jim, if the SEC is, in fact, going to be in a bargaining mode here with the industry, would you expect them to get out and try to, quote, "sell" the rule proposals? Or do you think they're going to stay inward and wait for the feedback? What is your expectation, Jim?

JIM TOES: I don't think they're going to come out trying to sell it. I mean, I think they have to read the comment letters. And then if they make a ruling against some comments, they have to say why they made the ruling against it. But just to go back just a little bit, I mean, I think one of the frustrations, I think, that we feel here is that there's just a lack of appreciation at the Commission that this-- there's around 230 broker-dealers in the world and the US that hold retail client accounts who rely on these wholesalers to have those orders executed in the marketplace. And we feel that, in the Chair's speeches and in his remarks, he only talks about Robinhood and Citadel. And this is a much bigger story than that. It's a lot of these large wire houses, the large firms out there, that have a lot of retail flow that they're either handling on their desk into the marketplace, or they provide some type of self-trading platform for the investors to do it. So I just hope that that group becomes a voice on this to get some common sense into some of these ideas that they're thinking about. We need new people at the table on this. And so that having them there, these unconflicted broker dealers who are not selling their order flow, and to really be telling their story about how much they rely on these wholesalers and the client service levels that they're providing to get their orders executed.

PETER HAYNES: It's going to be interesting, if the wholesaling relationship is somehow fractured, what are those firms going to do? Or are they going to have to continue to use introducing brokers to help them with execution? Are they going to have to pay for it? Does that change the dynamic completely? Jimmy, one other question for you because you are our resident expert on the Hill. There's some suggestion that there will be some Congressional hearings as a result of these proposals, once we get a new Congress sitting. And it's kind of laughable, as we speak right now, that we can't set up any committees or do anything until they can actually figure out how to elect a Speaker in the House. But the reality is that once things get settled in-- and I know you've had some chats with Representative McHenry's group-- assuming he is, in fact, going to be the head of the House Financial Services Committee, is it your expectation that in short order he'll be calling Gensler to the carpet to answer questions around these proposals?

JIM TOES: Yeah. Yes. I mean, I think he's made it pretty clear that there's three general themes that he hopes to achieve in the next year or two if he ever gets in a seat-- is something meaningful in the crypto space, capital formation, and also oversight of the SEC. And I do think it's important, I mean, in that as they think about their approach with him, with the Chair, that he's got-- obviously, if you're down in DC, you have thick skin. You can take criticism that goes, oh, no, you're being political, or you're being too tough. You can take that. But I do think that there is a case that can be made around competency with this Chair: And I do hope that if they do have an oversight hearing with him, that that's kind of the angle that they take, more than just about fairness, and you're being too hard, and so on.

PETER HAYNES: Obviously, we've covered a lot of material, and it's taken a long time. It's not surprising, guys. I mean this is an extremely complex topic and with lots of different factors at play here. So I really appreciate you digging in and getting a little deeper into the weeds here. It gives us listeners-- our listeners, I should say-- something to talk about. And your expertise is very much appreciated. So on behalf of TD Securities, again, Mett, Doug, Jim, thank you very much for your time today. And we'll, I'm sure, be convening on this topic again soon.

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