In mid-December, the SEC released four separate proposals that collectively represent the most significant U.S. equity market reform initiative since Regulation NMS in 2005.
So far, industry reaction has been overwhelmingly negative and, in certain cases, unambiguously critical of SEC Chairman Gary Gensler and his staff. But one must consider the lens through which the most vocal opponents view the SEC proposals before blindly accepting industry criticism as the universal consensus.
America's public equity ecosystem encompasses a diverse group of entities with varying interests, resources and perspectives. For instance, the orders and trading strategies of an institutional investor seeking to establish buy-and-hold positions differ from those employed by, say, an automated market maker trading in and out of small positions throughout the day. Thus, a change to the market's infrastructure that negatively affects one market participant may very well serve to benefit another.
Contrary to the criticism we have heard to date — mainly from a minority of firms whose entrenched interests would be adversely affected by the proposed rule changes — it is our contention that institutional investors (and investors in general) would realize a net benefit should certain aspects of the SEC proposals ultimately gain approval.
In this piece, we focus on what is arguably the most controversial of the SEC's four proposals — the proposed rule to enhance competition for stock orders entered by retail investors — and its potential implications for investors more broadly.