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Healthy Markets Advocates for Changes to SEC’s Order Handling Rule Reforms
Traders Magazine Online News, December 17, 2018
By John D’Antona Jr.
Healthy Markets, a financial markets consultancy, shared with Traders Magazine its latest comment letter on recent Order Handling Rule reforms. The consultancy believes the current reform package could have negative effects on smaller firms and brokers and proposes changes of its own.
Below is a copy of the letter.
Brett Redfearn, Director
Division of Trading and Markets
Securities and Exchange Commission
100 F Street, NE
Washington, DC 20549
RE: Disclosure of Order Handling Information, Rel. No. 34-84528; File No. S7-14-16
Dear Director Redfearn:
On November 2, 2018, the Commission adopted long-awaited order handling and routing disclosure reforms.1 While we appreciate the requirement that brokers who receive significant amounts of “not held” orders must now provide much greater details to investors who ask for them, we believe the Final rule will likely have significant, negative, unintended consequences for many smaller brokers, advisers, and investors.
As detailed below, we urge you to assist the Commission in adopting several changes to the Final Rule without delay.
Negative Consequences From Using Order Type As a Proxy for the Type of Investor
In announcing the Final Rule, you declared “[a]ll investors, from Main Street investors to sophisticated asset managers that manage pensions and other funds, deserve to receive information from their brokers about how their orders are executed within our omplex stock trading environment.”
We agree. However, rather than do that, the Final Rule only requires greater disclosures of some orders sent by some institutions (typically, just very large ones) to some brokers (generally, those that do not have large retail businesses). In fact, by the Commission staff’s own analysis, the Final Rule will exclude from its definition of “institutional order” as much as 60% or more of all orders from institutions.
As the economic analysis in the Final Rule explains:
The staff studied orders submitted from customer accounts of 120 randomly selected NMS stocks listed on NYSE during the sample period of December 5, 2016, to December 9, 2016, consisting of 40 large-cap stocks, 40 mid-cap stocks, and 40 small-cap stocks. Consistent with the comments, the staff analysis confirms that orders received from institutional accounts are more likely to be not held orders than orders received from individual accounts. Specifically, the staff analysis found that among the orders received from the institutional accounts, about 69% of total shares and close to 39% of total number of orders in the sample are not held orders
Only firms that send a significant volume of “not held” orders to brokers that also happen to have “not held” orders comprise a significant chunk of their overall businesses will benefit from the new detailed order handling disclosures. All other orders -- including all orders from the majority of investment advisers overseen by the Commission and state securities regulators -- are likely excluded. We understand why larger financial firms appreciate the enhanced disclosures, which they -- and we -- appreciate. We also appreciate that the Final Rule covers more orders than the proposed rule, which had included an ill-advised distinction for orders totaling more than $200,000 in value.5 The largest investment advisers will get most of what they would like to perform high quality transaction cost analyses and best execution reviews.
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