Publication

Black Box

For many of us, the stock market is a black box. We don’t know the details of how orders are executed, and we don’t need to know. This is changing. On December 14, 2022, the SEC issued four separate proposals related to equity market structure:

• Disclosure of Order Execution Information
• Regulation NMS: Minimum Pricing Increments, Access Fees, and Transparency of Better Priced Orders
• Order Competition Rule
• Regulation Best Execution

To appreciate the issues the rulemaking is intended to address, we must understand equity market structure and how stock orders are executed. Although the proposals only directly impact BDs that route or execute orders, there is indirect impact on introducing BDs and IAs.

Consider an IA that is performing a best execution review. Typically, a key component of this review is reviewing the custodian’s execution quality statistics, specifically, percentage of price improvement. As of December 27, 2022, Fidelity Investments (“Fidelity”) discloses 90.6% price improvement, $17.46 average savings per order and average execution speed of 0.08 seconds.5 While these statistics appear to be monumentally impressive, they may be “suboptimal” if inferior compared to competitors.

A basic understanding of how orders are executed will provide the foundation for comprehending issues in equity market structure, proposed rulemaking and how to meet regulatory obligations such as best execution. Below are definitions and explanations of current equity market structures, and a brief summary of the new proposed rules.

To read the entire NSCP article, please click here.