Republican senators seek answers on SEC equities market proposals

Five Republican senators are raising concerns over recent Securities and Exchange Commission proposals aimed at bolstering U.S. equity markets that they say were introduced without proper input from stakeholders and could harm investors and the economy at large.

"Any effort to ram through hurried rule-making without proper analysis, deliberation or consideration of downstream impacts is nothing short of regulatory malpractice," said Sens. Thom Tillis, R-N.C., Bill Hagerty, R-Tenn., Mike Crapo, R-Idaho, Kevin Cramer, R-N.D., and Cynthia Lummis, R-Wyo., in a Jan. 20 letter to SEC Chairman Gary Gensler.

The letter was written in response to several rule proposals the SEC approved at its Dec. 14 meeting. Each of the proposals focused on equity market structure, but the Republican senators have taken particular issue with one proposal.

That proposal would require certain retail equity orders to be exposed to open auctions before such orders could be executed internally by any trading center that restricts order-by-order competition.

Mr. Gensler said in a statement last month that the proposal is "designed to bring greater competition in the marketplace for retail market orders. I think it makes sense for the market, and for everyday individual investors, to allow the broader market to compete for their orders."

In the market currently, retail brokers route more than 90% of orders to a small group of off-exchange dealers, known as wholesalers, the SEC said in a fact sheet. This routing practice is known as a type of segmentation and reflects the fact that these orders impose lower costs on liquidity providers than unsegmented order flow, the SEC said.

But the Republican senators said the SEC has yet to release a detailed analysis of this proposal, nor has the agency elaborated on how it would increase competition.

The proposal would require companies to build onerous and technologically difficult systems, thereby reducing competition, the senators argued. "Raising regulatory requirements to a level that only large players with consolidated market share possess the resources to meet strikes us as antithetical to any effort to increase competition," the senators said. "These market structure changes, among several others proposed under your leadership, do not seem to adequately contemplate the dynamic nature of increasing numerous regulatory burdens and the likely reintroduction of trading fees or other disruptions that would hurt investor access — especially those new to markets."

The senators requested information from Mr. Gensler about the analysis the SEC conducted in issuing the proposal and requested a response by Feb. 3.

The proposal's comment period is open until March 31.