Transparency, Conflicts & Best Ex: Where Do We Go From Here?

Posted by Joe Wald on Jul 29, 2020 4:30:00 PM

Concerns about conflicts of interest have long been top of mind for players in the equity trading space. There's been no shortage of discussion around protecting the interests of end-investors and rooting out conflicts in broker routing. Much of the industry's regulation aims to address those conflicts, including the SEC's proposed Transaction Fee Pilot. Had the pilot received approval, it would have studied how exchanges' pricing may create conflicts of interest for broker-dealers, which in turn may harm investors.

While I believed we could have gleaned useful information from the pilot and was somewhat surprised by the court's decision to block it, I don't see this as an end to the conversation. The question becomes, where does the industry go from here?


I'm optimistic about some of the other initiatives on the SEC's docket that can help improve market quality. Getting broader, more diverse representation within SIP governance would be a huge step forward. We encourage the regulators to continue looking at how exchange medallions play into this. With respect to market data infrastructure, Clearpool's view is that the SIP can become more competitive by adding additional price levels, auction data, and odd lot information. We should also continue discussing the Order Protection Rule and the challenges posed by using the same rule for all stocks, all the time, across retail and institutional constituents. Perhaps OPR should not be a one-size-fits-all solution.


Looking at tools we have at our disposal today, CAT and 606 are both newly live in the market and will gather enormous amounts of data. Will the data collected through these initiatives divulge the order routing conflicts the Transaction Fee Pilot intended to seek? Or perhaps we'll find that the mere existence of these tools which provide more transparency will discourage biased order routing protocols. I firmly believe that these will be healthy tools for our market and will be transformative in how we take a more data-driven approach to regulation and decision-making. This data will also provide broker-dealers with additional opportunities to demonstrate their execution quality and differentiate their electronic trading capabilities.


Thinking about what the future may hold, I imagine we'll see an evolution in the traditional commission structure as some institutional community members explore a cost + commission model where fees and rebates would be passed through to them. Once again, pricing should not be a one-size-fits-all solution. Each asset manager has unique workflows that may require different pricing models. Still, there is no better time than the present to have conversations around how commission structure ties into execution quality and transparency. 


Progress is on the horizon. Those who are well-equipped with the right people, the right microstructure expertise, and the right technology will be best suited to deliver bespoke solutions that help their clients achieve the execution outcomes they desire.  


Clearpool looks forward to continuing these discussions and playing an active role in bringing more transparency to the industry and giving participants more control over their trading outcomes. To hear more about transparency, conflicts of interest, and best execution, listen to the inaugural episode of STA's Trading Views podcast.


STA Trading Views


Topics: Market Microstructure, Differentiation

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