Remarks at the Roundtable on Trade-Through Prohibitions

Good afternoon, ladies and gentlemen. I am glad to be with you to kick off the afternoon portion of today's program. Before sharing a few reflections, I should point out that the views I express here are my own and do not necessarily reflect those of the SEC as an institution or of my fellow Commissioners. And of course, I should also like to thank each of our moderators, presenters, and panelists for lending their expertise to the task of examining items in our rulebook that warrant a refresh. We heard some thoughtful exchanges on Regulation NMS this morning. And in just a few moments, we will turn to our next panel on trade-through prohibitions, which is a policy that I have followed closely for several years-and one that I believe very clearly demands a course correction.

As others have noted, the SEC adopted Reg NMS over two decades ago.[1] Reg NMS consolidated the existing "national market system" rules under Section 11A of the Securities Exchange Act of 1934 and imposed a series of new market structure "reforms," including the "Trade-through Rule," the "Access Rule," the "Sub-Penny Rule," and "Market Data Rules." In short, Reg NMS gave the SEC an opening to substitute, indeed supplant, its own judgment for that of the marketplace. And today, we are devoting this roundtable discussion to what I believe is by far the most problematic provision-Rule 611, or the Trade-through Rule, whose deceptively benign name can do little to disguise the distortions it has wrought.

For context, the Commission approved Reg NMS at a time of considerable transformation. Electronic trading systems continued to unsettle old assumptions about how markets could function as order handling and routing practices became more transparent. Intensifying competition, meanwhile, drove commissions lower and penny pricing reshaped the mechanics of trading. Left to market forces, I believe that these trends would have steered the national market system toward an outcome far more favorable to what the Trade-through Rule has delivered. Indeed, Congress rightly expressed in the Securities Acts Amendments of 1975 that competition-not regulation-ought to guide the evolution of our markets.[2] Regrettably, the Commission rebuffed that contention. And while the markets were still developing, the SEC decided to dictate how to "fix" them.

Now, the stated purpose of the Trade-through Rule was "to increase displayed depth and liquidity in the NMS and thereby reduce transaction costs for a wide spectrum of investors, particularly institutional investors that must trade in larger sizes."[3] In practice, however, the rule restricted the price at which investors could trade by mandating execution at or within the National Best Bid and Offer (NBBO). This led the industry to treat price as the only factor when considering "Best Execution." If left to their own judgment, participants could favor one exchange over another due to speed, the likelihood of execution, or the attributes of various order types. I suspect the exchanges would have continued to innovate along many of these dimensions. Instead, the Trade-through Rule reduced every consideration to a single characteristic: price.

To be sure, I have long and vigorously supported Regulation NMS's overarching goal of enhancing the efficiency of our markets. My differences have always concerned the means of achieving this objective. As the Trading and Markets staff wrote in 2015, "[t]he SEC has often noted that one of the primary challenges in its oversight of the national market system is to facilitate an appropriately balanced market structure that promotes competition among markets, while minimizing the potentially adverse effects of fragmentation."[4] The fragmentation that has followed Reg NMS is now obvious. Unfortunately, the economic analysis in the original adopting release failed to grapple with the risks of fragmentation, its adverse impact on competition, or frankly any costs beyond implementation. This was a gross oversight that informed a myopic approach to regulation.

To some of us who were here at the time, this short-sightedness was evident. My fellow Commissioner Cynthia Glassman and I spoke openly about where the Commission could have avoided its missteps. In our dissent, we argued that it would have been better "to improve access to quotations, enhance connectivity among markets and market participants, clarify the broker's duty of best execution, and reduce barriers to competition."[5] The Commission, however, chose to reject our arguments-as well as concerns thoughtfully articulated by many commentators. And that choice precipitated a highly fragmented market governed by rules that invite gamesmanship.

Ironically, a rule intended to strengthen liquidity has instead splintered it among an unprecedented number of venues. The result is a marketplace with more trading platforms than ever, but fewer broker-dealers and traditional market makers to knit it together. Those intermediaries have succumbed to a combination of increasing technology costs, exploding regulatory costs, more competition for a shrinking active trading clientele as passive investment vehicles have become more popular and flexible, among others. Much of this is great for investors, at least in the short term, but what does it mean for marketplace health in the long term? We are 20 years out from the troubled promulgation and implementation of Reg NMS; what will things look like in another 20 years if the status quo remains?

Meanwhile, the fallout of the Trade-through Rule extends also to forcing institutional investors to exhaust the often-limited amount of liquidity available at the NBBO before they can access the larger pools necessary to execute substantial block trades, potentially revealing their intentions to a market eager to pounce on any information leakage. None of these outcomes is a hallmark of the worthy goals of a fair, orderly, and efficient market.

So today, I am quite pleased that the staff is engaging in a reassessment of Reg NMS. I am eager to hear the insights and perspectives that will emerge from our next two panels. Reg NMS has fundamentally reshaped our markets, and the Commission has layered two decades of rules upon its flawed foundation.

That is not to say that things cannot be improved. Many of the problems that we face today in the markets stem directly from the unintended consequences of regulatory policies. This sort of situation usually results when policymakers substitute their own judgment for that of the markets. As the staff reviews Reg NMS and develops recommendations, I have asked them to take a considered approach to avoid repeating the mistakes of 20 years ago. Regulations must evolve alongside the markets, and I am committed to ensuring that a future Commission is not saddled with the same challenges we left for ourselves two decades ago.

In light of these reflections, I thank you once again for your engagement and for your dedication to this critical dialogue. The work before us will help the SEC to fulfill the goals set forth in its mission. I look forward to the discussions to follow. Thank you.