Things are getting gritty down here in the trenches.
If you’ve been following along, We The Investors (WTI) kicked some serious ass on our comment letter campaign. With more than 5,300 comment letters, we demonstrated clear, widespread, and well-informed support among individual investors for the SEC’s equity market structure reforms including:
Rest assured, you have been heard. The SEC is listening to us. We have a seat at the table, which is one hell of a start.
But somebody else is listening. Those who oppose us are also receiving our message loud and clear.
How can we be sure? Wholesalers like Virtu and Citadel have planted themselves firmly between progress and the status quo. And as part of that campaign, they are working overtime to discredit our efforts.
On the one hand, it’s nice to see them out there earning that sweat-equity after years of coasting on easy money.
On the other hand, it’s disheartening (and time-consuming) to respond to what is now a near-constant barrage of deceptive tactics.
We’d all make so much more progress if they’d just stick to the facts.
Instead…
All Together Now?
Today, we draw your attention to a rather peculiar document entitled “Growing Consensus Supports Phased & Limited Reforms.” Initially circulated around Congress without any branding or attribution, and then published without specific authorship on Virtu’s website on April 20, 2023, the kind-of-anonymous infographic says that “Except for the proposal to enhance Rule 605, there is broad opposition to Gensler’s proposals.”
Specifically, Virtu claims that institutional investors broadly reject the Best Ex Rule, stating that “The SEC should NOT adopt this proposal” which “Will undermine existing investor protections.”
Likewise, says Virtu, the industry broadly rejects the Auctions Rule, indicating that “The SEC should NOT adopt this proposal” because it “Will harm investor execution quality.”
And hey, maybe that’s true, right?
After all, it would surprise none of us to learn that a whole bunch of financial institutions have banded together to prevent reforms that might level the playing field, add safeguards for everyday investors, enforce existing rules, and promote widespread transparency.
Indeed, Virtu makes the claim using a bright red font. And they do include dozens of bold corporate logos just below. Convincing stuff.
And it sort of tracks, I suppose.
We know exactly why wholesalers like Virtu and Citadel oppose the SEC’s reforms. As proposed, the Best Execution and Auction rules would put an end to Payment for Order Flow (PFOF), an arrangement that has netted wholesalers untold billions for order routing without price competition.
These “market makers” are perched at the high end of a crooked playing field. There is ample evidence that they will do and say anything to protect the status quo.
But Virtu would also have us believe that there is “broad opposition” to these market reforms–that by and large, the financial industry rejects these reforms with the same unmoored ferocity.
Surely, if this claim is true, there would be no reason to lie about it, right?
Isn’t It Semantic?
Before we explore the merits of this claim—that there is “broad opposition” to market structure reform—let’s quickly define a few terms.
Did you know that there’s a not-insignificant difference between the words misinformation and disinformation?
Misinformation is accidental—the inadvertent proliferation of non-truth. Let’s say, for example, you told all of your friends that Walmart had great deals on electronics this weekend, but it turns out it was actually last weekend. Whoops.
Alternatively, let’s say you told all your friends you could get them a great deal on electronics at Walmart, then you collected a bunch of money from them, spent the whole lot of it buying tacos and Fabergé eggs for yourself, and disappeared into the wilds of Appalachia with your Out of Office message switched permanently on.
That would be disinformation. You obviously did that shit on purpose.
Now, back to our friends at Virtu…
Sweet Disinfographic, Bro!
Virtu’s 4/20 Infographic reeks of mind-altering substances. How else to explain the stark contradiction between public comments from certain firms and their inclusion here?
Well, sure, but they also said:
"We broadly support the Commission’s proposals and its goal of enhancing execution quality for all investors, and its pursuit of that goal by encouraging order-by-order competition, particularly for segmented orders. By moving retail flow onto the exchanges, where a variety of market participants can compete for them, we hope the Commission will succeed in creating opportunities for better price improvement for retail flow as well as enhanced execution quality for institutions, who currently have no opportunity to compete to interact with the vast majority of that flow."
Virtu fails to mention that Dimensional wrote a comment letter with nuanced views on the OCR:
“The opportunity to compete for retail orders could be a positive development for some market participants, including institutional investors, and we generally support market-created mechanisms that would enable more market participants to interact with retail order flow. For example, at Dimensional, our portfolios tend to be widely diversified, and thus we believe it is likely that our clients would benefit from the opportunity to interact with retail order flow.”
Oh, here’s a good one. I love this one.
Let’s just zoom out on that statement for a second, which comes to us from NASDAQ’s comment letter…with concrete recommendations for how to improve the OCR:
“Nasdaq believes that finding ways to bring more retail investors together in a competitive environment is a worthy goal which would benefit retail investors, institutional investors, and the market as a whole. That said, the SEC risks too much by solely focusing on qualified auctions, as there is no silver bullet solution to the problem it identifies. In lieu of imposing a prescriptive and untested solution, we instead recommend that the SEC define a minimum price improvement threshold (e.g., a percentage of the spread) that broker-dealers must meet in order to internalize retail order flow. If a broker-dealer is unable to provide meaningful price improvement on a retail order, then we suggest that it be required to send its order to interact on an exchange or a similar fair access venue.”
Oof. Bad look, Virtu.
…oh, you were waiting for a counterpoint? Nah dude. Robinhood is totally onboard.
In 2021, the SEC fined Robinhood $65 million for misleading investors with respect to PFOF. Reuters reports that “The regulator said certain wholesalers told Robinhood there was a trade-off between PFOF and price improvement for customers, and that Robinhood ‘explicitly offered to accept less price improvement for its customers in exchange for receiving higher’ PFOF.”
Anyway, I believe Virtu on that one. Robinhood is definitely on their team.
High Fidelity?
Let’s see if we can get a more sincere look from Fidelity, a firm that does not accept Payment for Order Flow on equities trading.
Fidelity’s logo is copy-pasted right up there with the rest of them, under Virtu’s banner claim, that the industry widely rejects Best Execution and Auctions rules.
Funny. That’s not what they’ve been saying…
In their own comment letter to the SEC, Fidelity said:
“We understand the SEC’s rationale for the Proposal, given market makers’ broad interactions with retail investor orders. As an institutional investor, we have limited opportunities to interact with retail order flow through a variety of market-driven solutions. We support finding ways for institutional investors to have better access to retail flow in a way that is beneficial to both constituents, and if a Qualified Auction might improve prices for retail in the process, it could drive better outcomes for end investors.”
Oh, here’s another fun one.
They also said that “Providing the space for natural liquidity to interact with minimal intermediation could improve execution outcomes for both retail and institutional investors. Auction models that bring retail and institutional investors together align with the Reg NMS mandate for the “most willing” buyer to meet the “most willing” seller. Critically, allowing market forces to ultimately determine the success or failure of such a mechanism should sidestep the litigation that is commonly believed to occur should adoption be mandated.”
According to Virtu, BMO said…well, nothing. We perused their very long list of decontextualized quotes and we didn’t see BMO anywhere on it.
However, BMO’s logo is right there on page one. In fact, it’s in the top line of corporate sponsors.
Uh oh. Looks like somebody’s intern got sloppy with the copypasta.
We’ll give them the benefit of the doubt on this one. Let’s assume this was merely done out of incompetence.
It’s less easy to explain this one away:
Cool cool. Yeah. They also wrote a two-page comment letter explicitly stating their support for Reg NMS, with some minor adjustments.
It goes something like:
“We support the SEC’s proposal to reduce the tick size that now applies to most securities from $0.01 to $0.005 for stocks that are heavily traded.”
There’s more, but I think you get the idea. Counting this group of pension plans as part of a “growing consensus” is just plain dishonest, and also laughably refutable. Or at least, it would be laughable if this infotainment wasn’t surely being brandished by Virtu’s lobbyists in Washington D.C.’s most popular pre-lunch Congressional watering holes.
Context Yourself Before You Wreck Yourself
It then becomes painfully obvious what Virtu is doing here. This mashup of logos and one-liners includes a surprising number of quotes taken from comment letters in support of the SEC’s reforms. You wouldn’t know it to look at Virtu’s construction-paper-with-glued-on-macaroni-style graphic department output. But this thing is cobbled together from every thoughtful critique or suggested tweak of the rules currently being proposed.
We should explain a thing about the comment process real quickly here…
That is entirely the point of it. The SEC creates extremely detailed rules to address complex problems, then we all suggest ways that the rules could work better for all of us. The thoughtful critique and the suggested tweaks are literally the way this whole thing is supposed to work.
Way to go team. We’re killing it.
So weaponizing these critiques and suggestions to torpedo the rules altogether is a willful perversion of the comment process.
Luckily, we submitted, like, so many more comment letters than they did..
Retail in the House Represent Represent
With that exact sentiment in mind, I’d like to close by parsing one more piece of the language from Virtu’s Disinfographic.
“In total,” they say, “the consensus comment letters represent over 300M investors and manage almost $30Tr of assets.”
Those consensus comment letters—two in number—were issued jointly by the following entities:
Show of hands if you are among the 300 million investors who feel that they are “represented” by these firms.
Not seeing any…
Nice work, class.
You are a product to these firms. You are represented by them like Happy Meals are represented by McDonalds. We are McNuggets to them—delivered in flash-frozen, prepackaged, vacuum-sealed shipping pallets, fried in hog lard, and resold for dollars on the penny.
Sorry. I over-metaphored. Also, I have no idea how McNuggets are made.
But…but…it is exactly that absence of transparency which defines the current marketplace.
If the firms above truly represented 300 million investors on the strength of two comment letters, they would have no problem shining a great big light on current Best Execution practices.
Virtu’s 4/20 comment letter reflects a continued effort to do exactly the opposite—smoke and mirrors meant to obfuscate, to distort, to disinform.
Real representation can be found in the more than 5,300 comment letters submitted by members of We The Investors. Real representation can be found in the more than 100,000 signatories to the WTI mission. Real representation can be found in the substance of our mission, which is to fight this darkness with illumination.
We absolutely urge any firms who have also been misrepresented by Virtu’s most recent effort to step forward and join us in this mission.
And for a deeper dive on this thing, check out the latest episode of Let’s Talk Markets with Dave and Pink!
Dave Lauer is a co-founder and CEO of Urvin Finance, where he leads the team in building Urvin Terminal. Prior to founding Urvin Finance, Dave spent over a decade advocating for financial market reform after quitting his job as a high-frequency-trader.