FLASH FRIDAY is a weekly content series looking at the past, present and future of capital markets trading and technology. FLASH FRIDAY is sponsored by Instinet, a Nomura company.
As traders, technologists and compliance officers wait to see if and how a quartet of important SEC equities market rule-change proposals move forward, for now a source of additional insight is the public comment letters.
The comments are important for at least two reasons: they provide a window into the industry’s thinking on a given SEC proposal, and they can offer some clues as to where revisions will be forthcoming. If a number of large and influential firms cite similar concerns about a rule change, it’s reasonable to believe the SEC is more likely to give attention to that aspect when considering revisions.
Comment letters weren’t always available with a few mouse clicks. Two decades ago, comments were available only via a Freedom of Information Act request, but in 2004, the SEC announced it would publicly release comment letters and responses. “We believe it is appropriate to expand the transparency of the comment process so that this information is available to a broader audience, free of charge,” the regulator said.
Some market participants may at times criticize the SEC for not being transparent enough in its rulemaking. But to be sure, nobody can fairly criticize the agency for lacking transparency with regard to public comments, because long or short, right or wrong, cranky or effusive, they are all fully published. And it is a very democratized presentation, with individual retail traders’ comments right next to those of large institutional organizations.
For instance, consider the SEC’s proposed rule that would require certain orders of individual investors be exposed to competition in auctions before such orders could be executed internally by a trading center that restricts order-by-order competition. This would be a significant change, requiring broker-dealers to recalibrate data management and surveillance, among other operational changes.
As of Feb. 9, the most recent comment is from SIFMA, in which the industry group requests the regulator extend the comment period for the four rule-change proposals by at least 30 days due to the “breadth and depth of the Proposals’ impact on today’s markets and market participants,” as well as a lack of data on how the proposals would impact markets.
The next most recent comment letter is from an individual, presumably a retail trader, named Perry Richardson. The full comment reads: “Dark pools should be done away with since this is the way hedge funds may be hiding buy orders and sending only sell orders to lit exchanges. Not fair to retail investors. It needs to be fair trade.
Sent from my iPhone”
Yes, the SEC offers such full disclosure of comments letters that it’s even known how Richardson transmitted his comment.
As of this writing, the preponderance of comment letters on the equities market proposals have been from retail investors, and most of those are very short, perhaps just a couple sentences. Comment letters from institutional firms, across the buy side, sell side, and exchange operators, are presumably in the works and will be available in the coming weeks.
Aside from the value of reading comment letters for their insight on the industry, of course there is also value in submitting comments.
“Comment letters can shape the public debate on proposals by the US Securities and Exchange Commission (SEC), the Department of Labor, and other regulatory agencies and standard-setters,” CFA Institute stated in a 2021 blog post. “Measuring our impact through comments letters involves more than simply counting the final rule as a binary victory or defeat. Given the deregulatory zeal of bodies like the SEC over the past four years, we opposed a number of rulemakings on investor protection and transparency grounds. Even when our views did not prevail, it was important to articulate them.”
The SEC may well extend its comment period for the equity-market proposals beyond the current March 31 deadline, but regardless, there will ultimately be a deep and rich set of comments for review.
