HOUSE COMMITTEE ON FINANCIAL SERVICES
CAPITAL MARKETS SUBCOMMITTEE
For questions on the note below, please contact the Delta Strategy Group team.
On May 20, the House Committee on Financial Services Subcommittee on Capital Markets held a hearing entitled “From Order to Execution: Ensuring Efficient and Transparent Equity Markets.” The witnesses in the hearing were:
- Dr. Robert Battalio, Professor of Finance at the Mendoza College of Business, University of Notre Dame
- Matt Billings, VP of Brokerage and President, Robinhood Financial and Robinhood Securities
- Kevin Kennedy, Executive VP and Head of North American Markets, Nasdaq
- Matt MacKenzie, Head of U.S. Policy and Regulatory Affairs, Optiver, on behalf of PTG Markets
- Joesph Saluzzi, Partner and Co-Founder, Themis Trading
Below is a summary of the hearing prepared by Delta Strategy Group, which includes several high-level takeaways, followed by summaries of opening statements and discussion.
Key Takeaways
- Committee Chairman Hill (R-AR) asked whether a strengthened, data-driven Financial Industry Regulatory Authority (FINRA) best execution standard could provide better outcomes for retail investors if Rule 611 were rescinded. Multiple witnesses agreed that FINRA Rule 5310 provides a sufficient backstop for best execution in the absence of Rule 611. MacKenzie stated Rule 5310 supplies an adaptable, multi-factorial framework that examines the size of the order, the depth of the order book, the speed and likelihood of execution, explicit and implicit costs, and information leakage, and that it is a more holistic measurement of execution quality than the narrow top-of-book price protection that Rule 611 provides. He said PTG supports revising or replacing Rule 611 with an outcomes-based best-execution framework.
- Witnesses and multiple Republican members agreed that the rules of Regulation National Market Structure (Reg NMS) are deeply interconnected and cannot be changed in isolation. Representative Nunn (R-IA) added that he believes the Securities and Exchange Commission (SEC) should consider delaying the compliance dates for Rules 610 and 612 so that firms do not have to rebuild their systems twice.
- Multiple Republican members raised concerns about the proliferation of exchanges under Reg NMS. Representative Nunn noted that the number of U.S. broker-dealers (BDs) dropped by almost thirty percent between 2010 and 2024 even as industry assets grew by nearly $2 trillion.
- Saluzzi and Kennedy agreed that the National Best Bid and Offer (NBBO) remains the benchmark for assessing value and execution quality in U.S. equity markets, with Kennedy stating that displayed quotes on lit exchanges form that benchmark and that price discovery built around the NBBO is what continues to attract global capital and make U.S. markets the envy of the world.
- Representative Casten (D-IL) raised concerns about the SEC’s potential innovation exemption for tokenized securities. Billings stated that the SEC has made it clear that a tokenized security is still a security, and that Robinhood is waiting to see how the innovation exemption develops.
- Ranking Member Sherman (D-CA) expressed concern about ongoing pressure to strip data out of the Consolidated Audit Trail (CAT), warning that doing so would hamper and delay future SEC investigations into market events and insider trading. Saluzzi stated that despite its flawed implementation, the CAT is fully operational and has proven to be a vital regulatory tool, and that to police markets effectively, the SEC requires robust tools like the CAT, adequate staffing, and the institutional will to prosecute market abuses.
OPENING STATEMENTS
Subcommittee Chairman Wagner (R-MO)
Revisiting central tenets of Reg NMS will allow us to properly assess the effectiveness of market regulations and address any inefficiencies. Competitive and dynamic equity markets are directly tied to capital formation, and regulations should facilitate new offerings rather than throw sand into the market’s gears. Maintaining high liquidity and innovative technology is crucial to making our capital markets the world’s best destination for everything from initial public offerings (IPOs) to secondary offerings. It is time to consider how modernizing equity market structure requires updating Reg NMS.
Subcommittee Ranking Member Sherman (D-CA)
Reg NMS requires that trades be reported, that exchanges provide reasonable access to information, and that exchanges use best execution. Zero commission is often paired with payment for order flow. As a result, investors are deprived of enhanced best execution and must settle for ordinary best execution, which means they may be selling lower or buying higher, but with no commission. At least we have a rule that requires disclosure of payment for order flow and a consolidated audit trail (CAT). The CAT is critical because we must fight against insider trading. Finally, the SEC has proposed eliminating quarterly financial statements. Insiders get information every day, yet we are told that ordinary investors should wait 180 days. Investors need more, better, and quicker information that is more reliable, not less.
Robert Battalio, University of Notre Dame
The 1975 Securities Act Amendments eliminated fixed commissions, mandated real-time reporting of trades and quotes, and introduced a consolidated tape that broadcasts information to market participants. These changes introduced vigorous competition for retail orders, leading to higher execution quality and lower commissions. We saw the introduction of discount brokers in the late 1990s, and Robinhood introduced zero commissions in 2015. Today, most retail orders receive price improvement and are executed within a few microseconds. As was the case in 2008, a careful analysis of the data, reveals that Rule 611 is not needed because economic and reputational incentives induce most market participants to avoid economically meaningful trade-throughs. I am skeptical of the need for new tick sizes. Exchanges should post quotes that are net of access fees, and the cap on access fees should be eliminated. This would allow the market to determine the optimal tick size for a stock.
Matt Billings, Robinhood
Looking at the current regulatory landscape under Reg NMS, some rules have outlived their original utility. Adopted over twenty years ago, Rule 611 was intended to protect investors but has increasingly become a burden. It has introduced excessive operational costs, compounded market complexity, and spurred an unwarranted proliferation of stock exchanges. Free from the artificial limitations of Rule 611, markets can compete more effectively on costs, technology, services, product innovation, and execution quality in pursuit of retail order flow. BDs owe a strict overarching duty of best execution to their customers. FINRA Rule 5310, the best execution rule, has stood the test of time, explicitly requiring BDs to use reasonable diligence to ascertain the best market and execute orders so that the resulting prices are as favorable as possible for the customer under prevailing market conditions. These requirements exist regardless of the existence of the trade-through rule. Removing Rule 611 could have significant impacts on other foundational components of Reg NMS, specifically Rule 610, fees for access to quotations, and Rule 612, minimum pricing increments. Because these rules are inextricably linked, removing the trade-through prohibitions of Rule 611 will undoubtedly affect access fees and tick sizes. Any modernization effort by the SEC or Congress should take a comprehensive approach.
Kevin Kennedy, Nasdaq
Policy should support innovation and competition without undermining transparency, liquidity, or, most importantly, investor protection. At the center of our equity market structure is the NBBO, which remains the benchmark for assessing value and execution quality. Displayed quotes on lit exchanges form that benchmark. Off-exchange venues serve valid purposes, but they depend on public prices created in the displayed markets. If policy weakens incentives to display liquidity, it weakens price discovery, and the market benchmark investors rely on. Today’s equity market is complex, with trading spread across exchanges, alternative trading systems, dealer platforms, and internalized execution platforms. Some fragmentation reflects competition, but reforms should recognize that market structure rules are interconnected and should not be changed in isolation. If Rule 611 is revised or removed, the SEC should also preserve incentives for lit, transparent trading, because public price formation benefits the entire market and is the foundation for capital formation. Regulatory sandboxes may be useful, but they should be transparent, temporary with a clear exit ramp, and paired with standard rulemaking if they become permanent. U.S. markets are highly competitive, but exchanges operate under a more constrained regulatory framework than many off-exchange venues. If policymakers want competition based on quality and transparency, exchanges need enough flexibility to compete while still meeting our public obligations.
Matt MacKenize, Optiver on behalf of PTG Markets
Reg NMS was designed for a specific policy problem: how to protect displayed quotations and promote competition among trading centers in an increasingly electronic market. The thinking behind Rule 611 is appealing. If one exchange is displaying a better price, why should an order execute at a worse price somewhere else? That question was of particular relevance twenty years ago, but the policy implications following from the SEC’s answer have become more difficult to justify in the fragmented market that Reg NMS produced. In 2026, a better displayed price may be available for only a small number of shares. It may be gone before a routed order arrives. It may require accessing a venue with low follow-on liquidity or relatively high explicit and implicit costs. For larger orders, mechanically routing to every protected top-of-book quotation can fragment execution, increase information leakage, and increase the cost of completing the remainder of the order. Price is central to execution quality, but it cannot be evaluated in isolation from the rest of any trade’s execution. This distinction is especially important because BDs already operate under best execution obligations. FINRA Rule 5310 supplies an adaptable framework that requires a member firm to use reasonable diligence to ascertain the best market for a customer order and obtain a price as favorable as possible under prevailing market conditions. Removing or substantially revising Rule 611 would not leave investors in a vacuum. Reassessing Rule 611 is necessary now because it has resulted in a market structure that has become increasingly fragmented, operationally complex, and dependent on regulatory workarounds that were never the end goal of the rule. The SEC should consider revising or replacing Rule 611 with an outcomes-based best execution framework. The recently modernized Rule 605 reports should be used to provide better transparency in that new system. The market data revenue formula should be reformed to reduce or eliminate credits. Exchange fees should continue to receive rigorous scrutiny. Reg NMS rules that are interconnected with Rule 611, such as Rules 610 and 612, should be reviewed and revised in concert with it. The goal of modernizing Reg NMS is straightforward. Venues should compete to provide real liquidity and better executions, and regulatory incentives should reward the best outcomes for investors.
Joseph Saluzzi, Themis Trading
While the SEC has tackled some important market structure issues over the past decade, including the CAT, other market structure issues have been overlooked. These include fragmentation of execution venues, an increasing percentage of trades executed off-exchange, segmentation of liquidity within alternative trading systems, stock exchange rebates, and information leakage from stock exchange proprietary data feeds. Eliminating the Order Protection Rule will not solve any of these problems. Fragmentation will continue, off-exchange venues will continue to grow their share, segmentation will continue, and stock exchanges will continue to offer rebates to their clients. We urge this committee and the SEC to reject any push to eliminate Rule 611 simply to clear a path for an innovation exemption involving tokenization. Allowing trading of tokens without the explicit consent of the underlying public companies, and without conferring voting rights or dividends, is dangerous. It will fuel fragmentation, distort true price discovery, and severely damage public investor confidence. This brings me to Rule 610. Stock exchanges recently requested exemptive relief to delay the implementation of lower access fees, claiming that the industry needs more time to see what happens with Rule 611. We strongly disagree. The amendment must go into effect in November. The CAT has been fiercely attacked by industry participants. Despite its flawed implementation, the CAT is finally fully operational and has proven to be a vital regulatory tool. Perhaps the CAT could use less options data, but it may also need more trader information to link related accounts. The point of the tool is to identify market events and insider trading. To police these markets effectively, the SEC requires robust tools like the CAT, adequate staffing, and the institutional will to prosecute market abuses. The U.S. equity market appears deep and liquid but still has many underlying conflicts that compromise price and liquidity discovery and could result in a rapid deterioration of liquidity, like we experienced during the flash crash of 2010.
DISCUSSION
Chairman Hill (R-AR): Could a strengthened, data-driven FINRA best execution standard provide better outcomes for retail investors by looking at speed and fill probability over a narrow top-of-book price? Billings: With FINRA Rule 5310, yes, it can. We appreciate the fact that it is a principles-based regulation that protects our customers. If Rule 611 were to go away, the retail customer will be protected. It is strong in the processes we have in place today, starting with daily exception processes and extending into dashboard reviews of every order type and every session that we are active in. We are confident that investor protection will continue to be strong. If FINRA were to reinforce Rule 5310, that is fine as well. Over the years, FINRA has stood the test of time and has periodically issued regulatory notices to reinforce particular points; Kennedy: When we first got wind that Rule 611 would be considered for removal, we were largely agnostic. Rule 610 exists today because of Rule 611, and it all comes back to capital formation, price discovery, and all of those things, because we need liquidity. What we did appreciate was that the SEC under Chairman Atkins wanted to be transparent, wants to move the markets forward, and wants to modernize. As operators and the largest providers of liquidity in equities, we need to work with our regulators. What we would like to see is the removal of the access fee cap so we can compete on rebates, because the access fee cap drives the rebates. We have talked at length about the value of rebates. They are transparent; they tighten the markets; we see it quarter after quarter with markets getting tighter, and they attract capital; MacKenzie: PTG believes that the multi-factorial analysis in FINRA Rule 5310, looking at the size of the order, the depth of the order book, and a number of other factors, is a more holistic measurement of execution quality. We feel that in the absence of Rule 611, that standard would be quite positive. On the data side, the modernization of Rule 605 data was a positive development. In a new system where Rule 611 is repealed, we would expect Rule 605 data to be helpful as well.
Ranking Member Sherman (D-CA): What are some other risks to investors and the markets if we create a two-tiered market where tokenized securities and on-chain platforms are exempted from core securities regulations? Saluzzi: There could be a benefit to tokenization if done the right way. There is a potential opportunity to improve the infrastructure and plumbing of the stock market. Where you will have a problem is if you have these side rooms operating with a dislocated price. There are certain crypto platforms where you can trade stocks even before they are public, but you are trading a derivative, a synthetic, but it has nothing to do with the underlying security.
Representative Casten (D-IL): Do you think a tokenized security should be regulated differently by different regulators depending on what platform it is offered on? Kennedy: Tokenized securities are regulated by the SEC, and they provide the guardrails that we follow. We are bringing tokenized securities into the Depository Trust and Clearing Corporation (DTCC) and within the SEC framework.
Representative Lucas (R-OK): What aspects of our equity market structure need to be preserved as the SEC contemplates improvements to Reg NMS? Battalio: Even during the original discussions in the 2000s, the trade-through rule was not needed. We did not need to be regulating fees, and that is true today. The one rule that has value is the market data rule. Exchanges need to be compensated for their data. The Securities Act Amendments took something of value from the exchanges and gave it to the rest of the market. They need to be compensated, and that is how the market data rules work. There are problems with the way the data rule allocates revenue, and that could be worked on. The other thing that is useful to keep is a meaningful priority for limit orders on a given exchange. If someone steps up and is willing to trade, you want them to get rewarded for that.
Representative Lucas: What spillover effects should the SEC be mindful of as it considers changes to Rule 611? Kennedy: The number one thing to consider is whether we are going to preserve the price discovery and liquidity. That is the most significant concern in the context of any change. As long as Rule 610 and the access fee are unchanged or removed, we are in a good position to continue the markets the way we have them today. There are still constructive things we can do to work with the Commission, but we have to remove what was attempted in the last administration, or there will be unintended and unpleasant consequences; Mackenize: I think you will hear a common refrain from all the witnesses at this table that the rules of Reg NMS are interconnected, and specifically that Rule 610 and Rule 612 would need to be modernized at the same time that any Rule 611 proposal moves forward. If changes are made in a piecemeal approach, you can see dislocations because of the interconnected nature of these rules. The locked and cross-market prohibition in Rule 612 is a strong candidate for modernization, given how the markets have evolved today.
Representative Lucas: As the industry transitions to faster settling cycles, we know it significantly reduces counterparty credit risk and default contagion. How should regulators be thinking about balancing the benefits and risks of this process? Billings: There is an advantage with tokenization in that it offers the potential for immediate settlement, and as tokenization evolves, we will see how we can speed up settlement cycles. Robinhood is advocating for a T-zero settlement regime. When we moved from T-plus-2 to T-plus-1, that was over a year’s effort to organize and coordinate the industry. We moved to T-plus-1 over the Memorial Day weekend of 2024. It was a high point for the industry that year, and the fact that it was such a significant change required an enormous amount of effort and coordination. Taking the next step toward industry-wide global settlement will require that same level of effort and coordination to ensure that everyone can operate safely. Even though tokenization offers an experimental lens through which to explore shorter settlement cycles, it is going to take a tremendous effort to shorten them further on an industry-wide basis.
Representative Davidson (R-OH): When we look at Rule 611, what should we be paying attention to? Battalio: We should step back and think about whether the market for retail order flow has ever been more competitive, and it has not. If you look at the Rule 605 reports, they document a certain amount of price improvement provided back to firms like Robinhood. If you look at the other dimensions that are not currently captured by those reports, the value proposition increases to 650 percent of what is actually reported. That tells you how much competition and broker vigilance is forcing those who execute trades to give back to investors. If the trade-through rule goes away, it does not affect the retail investor at all. It might help the wholesalers who execute trades to do so more effectively. What concerns me is that the Securities Information Processor (SIP) collects information from disparate places, and in recent work I have done, you can show that when information gets broadcast, reactions to trades get reported before the trade itself. That is being published as the NBBO used to benchmark everything. People who have to justify execution quality to FINRA and the SEC take snapshots of their view of the market via proprietary feeds, not the SIP, to show compliance. Institutional investors can take care of themselves. Do away with the trade-through rule and put the access fee into quotes so that the market participants can see the net price of trading. Institutions already do this.
Representative Davidson: Given that there is a whole exchange that runs by limiting trade speed through a long spool of cable that introduces a small amount of latency, and that people truly believe there is a dynamic at risk where they are not getting best execution and are not getting a fair shake in the market, how do we address this and provide consumer protections and ensure a fair market? Mackenize: That particular exchange and what it is bringing to the market is a sign of competition and innovation. The position of PTG is that a repeal or rescission of Rule 611 would force exchange competition. It would hopefully reduce the number of exchanges from the current 17, many of which capture a disproportionate amount of revenue. The very low-volume trading exchanges capture 31 times their trading revenue in fees that market makers like Optiver and other PTG members have to pay for.
Representative Stutzman (R-IN): Those opposed to rescinding this rule claim that trades would no longer be executed at the best price, but is it not true that BDs would still be required to pursue best execution under current FINRA rules if the SEC were to rescind Rule 611? Mackenize: Yes, it is. You can understand FINRA rules as price plus. Price is still a component of best execution under FINRA Rule 5310, but it also examines the size of the order, the depth of the order book, the speed of execution, the likelihood of execution, the costs associated with execution both explicit and implicit, and any information leakage. Understood in that context, in the absence of Rule 611, FINRA Rule 5310 acts as a real and comprehensive backstop to provide for best execution. PTG is a community of market makers, and our members pay connectivity fees, market data fees, and membership fees. We pay costs associated with clearing, testing, surveillance, and compliance, and we pay these costs to every exchange. The business model is to be present and providing two-sided liquidity all day long, competing with each other to fill those trades. A reduction in the number of exchanges that could result from the repeal of Rule 611 would be beneficial to us and to end investors.
Representative Stutzman: Would other aspects of our market structure regulations need to be modified in tandem? MacKenzie: Yes. Rule 610 and Rule 612 because all of these rules are really woven together and interconnected. In any rulemaking, we would hope that the SEC would examine a holistic view of all of these rules and how they fit together.
Representative Steil (R-WI): What is the architecture that is really needed? What needs to be overhauled, and particularly from a risk management perspective? In many ways, from a technical standpoint, you can trade 365 days a year, but what about operational resilience and risk? What do you mean when you say a technical pause when volumes are low could be helpful? Kennedy: Working with the industry on resiliency is core. This is where we need to work together rather than compete, and we have done that. We are putting in place guardrails that come first, meaning investor protection guardrails. Resiliency is critical as well, because at Nasdaq we are the only one doing this on our listed market. We will have two systems with overlap and incredible resiliency in case something goes wrong. We want time to be able to fill in bugs and address issues like that. Both systems will be backed up. On transparency, the two SIPs will also be running. Those three things together, resiliency, transparency through the SIP, and institutional-grade guardrails, are what makes it work. It will be better than what we have today. A 23-hour trading day will be better than the current 16-hour day.
Representative Steil: Are there concerns if trading volumes are low as you expand trading hours? How should policymakers be thinking about that? Kennedy: It is just about infrastructure. That market is already growing. We are seeing it overseas. On any given day, trading outside of core hours is about ten to twelve percent over the last two months, up from seven or eight percent previously. If it even just stabilizes, we will still find other positive intended consequences where we attract more traders, and the U.S. will continue to lead the world.
Representative Steil: Within the innovation of expanded trading hours, how is it impacting counterparty risk? Mackenize: As a result of institutional-grade safeguards, counterparty credit risk is really mitigated. These trades are cleared, and as a result it is not a huge concern. In a 24/7 environment, that is where you would want to see the movement of collateral over the weekend, and that is an area where tokenization efforts could actually be quite helpful.
Representative Nunn (R-IA): If the SEC scraps Rule 611, what reforms should be made so we can improve the market without knocking out the legs from under it? Kennedy: Rule 611 has to go down with Rule 610 if it moves. I also want to talk about the importance of rebates. For example, on one of our smaller equity exchanges, Nasdaq BX Equities, we brought our rebate down to zero and kept going. Our rebate structure now, when you remove the access fee, actually pays you. So instead of paying 30 cents per 100 shares, which is commonly cited, we pay 17 cents per 100 shares. The challenge is that you cannot easily attract liquidity to the quote because the other side of that equation requires a charge. To your question of what else the SEC should do, we want to compete in off-exchange trading. Right now, Nasdaq cannot take its BX or PSX platforms, including the Philadelphia Stock Exchange, the oldest stock exchange in the country, and innovate to compete with off-exchange trading, because there are different rules for off-exchange venues. We want to be able to segment and track retail order flow and offer an off-exchange venue with the same rules that some of our competitors have.
Representative Downing (R-MT): If U.S. exchanges are restricted from offering competitive rebates or setting their own access fees due to rigid SEC caps, while foreign markets remain flexible, do we risk a slow migration of liquidity away from our markets to overseas jurisdictions? Kennedy: The truth is, it would erode. I do not know the speed, but I know that spreads would widen. I can say that with certainty, and we would no longer be sitting here saying that U.S. markets are the envy of the world. We are today. We are attracting the largest initial public offerings (IPOs). We are having global investors implore us to come and trade 23 to 24 hours a day. That is what makes us the envy of the world, and it is built not just around liquidity but around the trust in our markets. Any movement that is considered in isolation puts that trust at risk.
Representative Downing: What technological advancements have occurred in the decades since Reg NMS passed that warrant revamping the rule to ensure that regulations are keeping pace with the markets? Battalio: The biggest technological advancement is simply the speed of computers and information processing. It has gotten to the point where executing venues, in order to prove that they complied with Reg NMS, have to take snapshots of their proprietary feeds, because if regulators like the SEC used SIP data from back in the 2000s, it would appear that there are just massive trade-throughs.
Representative Downing: Are there specific equity market structures in Europe or Asia that the U.S. should emulate to remain the global leader? Is U.S. overregulation currently driving liquidity to overseas dark venues? Kennedy: Overregulation is not a significant factor just yet. As much as we all want deregulation, we have to stay with the core principles that we have all talked about today, and Nasdaq especially adheres to those. I have not seen where I need to replicate something being done in Asia, India, or even Canada. I serve on some Canadian boards, and the truth is, they are emulating us. Everyone is trying to copy us; MacKenzie: Optiver is headquartered in the Netherlands in Amsterdam, and I wanted to add that European policymakers have routinely considered whether to implement a trade-through rule similar to Rule 611. This may be the single place where Europe is more efficient than the U.S. They have always rejected a trade-through rule in Europe.