▶ 0:00:01As Chairman Atkins has observed, and I quote, "Reg NMS gave the SEC an opening to substitute, indeed supplant, its own judgment for that of the marketplace." End quote. Revisiting central tenants of Reg NMS, such as rule 611, also known as the trade-through rule, will allow us to properly assess the effectiveness of market regulations and address any inefficiencies.
▶ 0:00:31Does a growing number of exchanges increase competition or just increase compliance costs? Are obstacles standing in the way of innovative new entrants into the market? Is rule 611 securing the best outcome for investors? These questions all deserve careful consideration.
▶ 0:00:51Competitive 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. Earlier this year, for the first time, US equity trading eclipsed $1 trillion in volume in a single day, a remarkable testament to the strength and the liquidity of our markets.
▶ 0:01:18It shows exactly why companies from around the world choose US exchanges for their public offerings. Maintaining high liquidity and innovative technology is crucial to making our capital markets the best destination in the world from for everything from IPOs to secondary 20 years in, it is time to consider how modernizing equity market structure requires updating Reg NMS.
▶ 0:01:47And I'm grateful that Chairman Atkins has undertaken a comprehensive review to determine how these rules can better serve investors. Because if regulations fail to evolve alongside today's capital markets, investors will ultimately bear the I would like to thank our witnesses for their testimony today, and I look forward to our discussion. I now recognize the ranking member, Mr.
▶ 0:02:15of the subcommittee for for 4 minutes for an opening statement. The whole world chooses American With an NMS regulation that should be if anything strengthened, but certainly not And yet there are a few crypto billionaires who see an opening here.
▶ 0:02:38Having spent more on politics than all the other industries combined, they now not only want to take over money market funds and replace them with unregulated, non-interest paying money market funds, but also and and the currency, but now our stock market by claiming that they're innovative simply because they're electronic and on a And yes, blockchain is one many of the many ways to use a computer,
▶ 0:03:08and I'm sure it's efficient for some purposes. But their goal here is to liberate themselves from all of the rules that protect investors and then "We're innovative because we can make more money." No, you're making more money not through technological innovation, not through economic innovation, but through political manipulation.
▶ 0:03:35requires the trades be reported, that exchanges provide reasonable access to information, that exchanges use their best execution, and I might add, there's this discussion about zero commission. Well, zero commission is is often or usually a a together with payment for order flow.
▶ 0:03:58And so, you're deprived of enhanced best execution, and you have to settle for ordinary best execution, which means that you may be selling lower or buying higher, but alas, no commission. at least we have a rule that requires disclosure of payment for order order flow and a consolidated audit trail. Why is that consolidated audit trail so critical?
▶ 0:04:24Because we have to fight against uh insider trading. Uh we've seen this most recently with uh those in our uh defense establishment betting on the when wars would start. Uh but insider trading is best known in the stock market.
▶ 0:04:42It's most frequent If you can't know who are the sellers or buyers, you can never prove insider trading, and you can never hold those accountable for insider trading to That's why we see a cabal uh telling us that because they're quote innovative, they shouldn't be subject to the know your customer anti-money laundering uh and they should have in effect a stock exchange
▶ 0:05:12free of any ability to hold those uh engaged in insider trading we uh uh need to apply the same standards to those who are trying to get into the business, to those who are already in the business.
▶ 0:05:33And it is not a uh a great to um uh fight politically uh to be you know, to to to get a free pass to third base and then declare that you got there through innovation and you're the most innovative hitter on the field. Uh finally, uh we have this proposal from the SEC to do away with quarterly financial statements.
▶ 0:06:01Insiders get the information every day. And yet we're told that ordinary investors should wait 180 days. investors need more and better and quicker information that is more reliable, not less. And so, we need information about who's buying and who's selling.
▶ 0:06:24We need information about what companies are And we can't have our great system Today, we welcome the testimony of Dr. Robert Battalio, a professor of finance at the University of Notre Dame, Mr. Matt Billings, the vice president of brokerage and president of Robinhood Financial and Robinhood Mr.
▶ 0:06:52Kevin Kennedy, executive vice president and head of North American Market Services at Nasdaq, Mr. Matt McKenzie, the head of US policy and regulatory affairs at uh up Optiver, uh here on behalf of PTG Markets, and then Mr. Joseph Saluzzi, partner and co-founder of the of uh Themis Trading.
▶ 0:07:20We thank each of you for taking the time to be here. Each of you will be recognized for 5 minutes to give your oral presentation uh of your testimony. Without objection, your written statements will be made part of the record. Mr. Battalio, you are now recognized for 5 minutes for your remarks. My name is Robert Battalio. I'm a professor of finance in the Mendoza College of Business at Notre Dame, where I've been for 30 years.
▶ 0:07:48Over those 30 years, I've studied and written papers on many of the topics we'll discuss today.
▶ 0:07:53I'd like to start by thanking the subcommittee chair Ann Wagner, ranking member Brad Sherman, and members of the subcommittee for holding this hearing and inviting me to participate and highlight my work over the past 30 The 1975 Security Act Amendments democratized US equity markets by doing three things. It eliminated fixed and it mandated the real-time reporting of trades and quotes.
▶ 0:08:20Uh something called a SIP broadcast this information to market participants. These changes introduced vigorous competition for retail orders, which caused execution quality to rise and commissions to fall. We saw the introduction of discount brokers in uh Schwab, Ameritrade, a bunch of those guys late '90s, Robinhood 215, zero commissions now. So, there's been I would say it's all kind of comes from the '75 Security Act Amendments.
▶ 0:08:51Today, most retail orders receive price improvement and are executed within a few microseconds. For point of reference, it takes about 350 microseconds to blink your eye. The retail trading experience has never been better. Could things be improved? Of course. As was the case in 2008, a careful analysis of the data data, I believe would reveal that Rule 611 is not Why?
▶ 0:09:16Because economic and or reputational incentives induce most market participants to to avoid economically meaningful trade-throughs. As you can see in my written testimony, I'm skeptical as to the need for new tick sizes. Rather, exchanges should post quotes that are net of access fees, and the cap on access fees should be eliminated. This would allow the market participant the market to determine the optimal size tick size for a stock. Thank you for the opportunity to testify.
▶ 0:09:43I look forward to your Next we have Mr. Billings. You are now recognized for 5 minutes for your Thank you, Chairman Wagner, ranking member Sherman, and distinguished members of the subcommittee for the opportunity to testify today on the state of US equity markets and the SEC's regulation NMS framework. My name is Matt Billings.
▶ 0:10:06I'm president of Robinhood Financial and Robinhood I have over 30 years of experience in the financial services industry, specifically in trading, brokerage, and market structure. Robinhood was founded with a single defining mission to democratize finance for all. Today millions of everyday Americans are participating responsibly in the capital markets because we have provided them with access through a low-cost, simple, and innovative platform.
▶ 0:10:35By pioneering zero commission trading and eliminating account minimums, Robinhood removed traditional barriers that kept generations of working-class Americans on the sidelines. We approach this responsibility with a safety-always mindset, ensuring that as we innovate, we prioritize protection and education of the retail investor. Crucial to our mission of democratizing finance is a steadfast commitment to market integrity.
▶ 0:11:04We firmly believe that everyday investors to truly benefit from access to a capital markets, those markets must be transparent, fair, and resilient. We are here today to discuss the mechanics of of the of our equity markets, the journey from order to Robinhood believes that our markets should provide opportunities for retail foster competition, and lower transaction costs. Today's equity markets are working for retail investors.
▶ 0:11:33They have never had it However, we share SEC SEC Chairman Atkins view that this is not to say that things cannot be improved. As you look at the current regulatory landscape under Reg NMS, it is clear that some rules have outlived their original utility. Specifically regarding rule 611, the trade-through rule, we believe it is time to consider a change. Adopted over 20 years ago, rule 611 was intended to protect investors but has increasingly become a burden.
▶ 0:12:06It was intro- It has introduced excessive operational costs, compounded market complexity, and spurred an unwarranted proliferation of stock exchanges. Ramadan supports the rescission of rule We believe that the modern equity market structure should be driven by free from artificial limitations of rule 611. Markets can compete more effectively on cost, technology, and services, product innovation, and execution quality in pursuit of retail order flow.
▶ 0:12:35Some have raised concern about execution quality if 611 is rescinded. Those concerns are addressed by existing independent obligations. Broker-dealers owe a strict overarching duty of best execution to our customers.
▶ 0:12:51FINRA rule 5310, the best execution rule, has stood the test of time, explicitly requiring broker-dealers to use reasonable diligence to ascertain the best market and execute orders so that the resultant price to the customer is as favorable as possible under the prevailing market These requirements exist regardless of the existence of the trade-through rule.
▶ 0:13:14We recognize, however, that market structure is highly complex and deeply Removing 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. Rule 610, 611, and 612 were introduced together in 2005 when the SEC adopted Reg NMS.
▶ 0:13:44Because these rules are inextricably linked, removing the trade-through prohibitions of rule 611 will undoubtedly affect access fees and tick sizes. Therefore, any modernization effort by the SEC or Congress should be a comprehensive approach. The SEC and Congress should evaluate how any changes work together to ensure a seamless transition that benefits the retail investor and market integrity.
▶ 0:14:10At Robinhood, we will continue to leverage advancements in technology to drive down costs and foster competition for the benefit of investors. We stand ready to work with this subcommittee and the SEC to ensure that any modernization of Reg NMS is and focused on the interests of everyday and market integrity. I thank the subcommittee for holding this important hearing.
▶ 0:14:36I look forward to answering your questions and discussing how we can build a a more efficient, transparent, and competitive equity market structure. Uh, thank you, Mr. Billings. Mr. Kennedy, you are now recognized for 5 minutes for your oral testimony. Chairman Wagner, ranking member Sherman, and members of the subcommittee, thank you for the opportunity to appear today on behalf of Nasdaq.
▶ 0:15:01My name is Kevin Kennedy, and I serve as the executive vice president of North American Markets Services at Nasdaq. I've been closely involved in the markets for over five different decades, beginning my career in May of 1987 as a liquidity provider trading equity options, index options, and equities. And for most of that time, I led my own trading firm with representation across multiple exchanges.
▶ 0:15:25I joined NASDAQ 19 years ago, and I appreciate the opportunity to offer the both a market practitioner's perspective and the perspective of someone who has spent much of my career helping operate regulated markets. The United States does have the deepest and most liquid equity markets in the world because of regulatory framework that has evolved over time supported innovation and balanced competition with investor and issuer protection.
▶ 0:15:56As the subcommittee considers market structure, I want to emphasize four points. First, displayed and transparent Displayed and transparent markets remain to investor confidence and price discovery.
▶ 0:16:11Second, reforms should be considered as a system because changes in one area can create unintended consequences in policy should support innovation and competition without without undermining transparency, liquidity, or most importantly, investor protection. And fourth, modernization should be and focused on better outcomes for investors and public companies.
▶ 0:16:40At the center of our equities market structure is the national best bid and You'll hear it referred today as 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.
▶ 0:17:06If policy weakens incentives to display liquidity, it weakens price discovery, and then the market benchmark investors rely on is also weakened. As we all know, today's equity market is complex with trading spread across exchanges, alternative trading systems, dealer platforms, and internalized execution Some fragmentation reflects competition, but reforms should recognize that market structure
▶ 0:17:36rules are interconnected and should not be changed in isolation. Order protection, quote accessibility, access fees, minimum price increments, best execution, and disclosure, they all work As the SEC reviews rule 611 of regulation NMS, it is appropriate to ask whether it still works as it was intended to work.
▶ 0:18:00But, if that rule 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. Technology today is reshaping capital markets, and policy should support without creating unnecessary risks for investors or market integrity.
▶ 0:18:28Regulatory sandboxes may be useful, but they should be transparent. They should be temporary with an with an exit ramp, and they need to be paired with standard rule making if they do become permanent. US markets are highly competitive, but exchanges operate under a more constrained regulatory framework than many off-exchange venues.
▶ 0:18:51If policy makers want competition based on quality and transparency, exchanges need flexibility, enough flexibility to compete while still meeting our public obligations. The central question is whether markets are delivering strong outcomes for invest- investors and issuers.
▶ 0:19:12That means looking at the best execution, looking at spreads, depth of liquidity, reliability, and Clear rules and transparent data are critical to accountability and investor US equity markets finance growth, they support retirement savings, and they attract global capital, as well.
▶ 0:19:34Modernization is necessary, but it needs to be measured, evidence-based, and designed to improve outcomes for investors and for public Nasdaq today looks forward to working with the commission and Congress on reforms that preserve the strength of the US markets. Thank you for the opportunity to testify. I look forward to your I thank you, Mr. Kennedy. And now, Mr. McKenzie. You're recognized your 5 minutes for your oral testimony.
▶ 0:20:02Thank you, Chair Wagner, Ranking Member Sherman, and distinguished members of the committee. I appreciate the opportunity to testify before you today. My name is Matt McKenzie. I am head of US policy and regulatory affairs at Optiver, a principal market making firm, SEC registered broker-dealer, and FINRA I'm appearing on behalf of PTG Markets. PTG represents firms that commit their own capital and provide liquidity across global markets.
▶ 0:20:30We're here today to discuss Reg NMS and specifically Rule 611. These rules were adopted in 2005, and over the last decade, PTG has consistently urged careful reexamination of Reg NMS and Rule 611 in particular. The SEC has already begun that process.
▶ 0:20:48In September of last year, the SEC held a public round table, where representatives from multiple PTG member firms participated to examine trade-through prohibitions in NMS stocks and listed options, and where Chairman Atkins stated that Rule 611 and Reg NMS deserve a public reassessment. PTG member firms feel the objectives of this review should be to define an outcome-based framework that protects investors, preserves transparency, and aligns regulatory incentives with actual execution quality.
▶ 0:21:20Reg 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?
▶ 0:21:40That question was of particular relevance 20 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.
▶ 0:22:09And 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. That does not mean price is unimportant. Price is central to execution quality, but the point is that price cannot be evaluated in isolation from the rest of any trade's execution.
▶ 0:22:34This distinction is especially important because broker-dealers 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. In other words, removing or substantially revising rule 611 would not leave investors in a vacuum.
▶ 0:23:02Reassessing Rule 611 is necessary now because, as I described in greater detail in my written testimony, 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. In light of these circumstances, we have five recommendations for modernizing the Reg NMS ecosystem.
▶ 0:23:25First, the SEC should consider revising or replacing Rule 611 with an outcomes-based best execution Second, recently modernized Rule 605 reports should be used to provide better transparency in that new system. Third, the market data revenue formula should be reformed to reduce or eliminate quote credits.
▶ 0:23:47Fourth, exchange fees should continue to receive rigorous SEC scrutiny, and fifth, 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.
▶ 0:24:05Venues should compete to provide real liquidity and better executions, and regulatory incentives should reward the best outcomes for On behalf of my firm, Optiver, and on behalf of PTG Markets, I thank you for the opportunity to appear before you, and I look forward to your questions. Thank you, Mr. McKenzie. Uh Mr. Saluzzi, you are now recognized for 5 minutes for your oral testimony.
▶ 0:24:30Thank you, Chairman Wagner, uh Ranking Member Sherman, and members of the subcommittee for giving me this opportunity to testify today. Uh my name is Joseph Saluzzi. I'm a partner and co-founder of Themis Trading. Uh for over 20 years, we have operated as a no-conflict institutional agency broker. We do not make markets. We do not trade proprietary. We do not own a dark pool. Our only Our clients are comprised of pension funds, mutual funds, money managers, and hedge funds. And together, they represent trillions of dollars of long-term investor funds.
▶ 0:25:00Our sole focus Our sole focus is providing best execution for our institutional clients and protecting long-term investors. While the SEC has tackled some important market structure issues over the past decade including the consolidated audit trail, other market structure issues have been overlooked.
▶ 0:25:17These include fragmentation of execution venues, increasing percentage of trades that are executed off exchange, segmentation of liquidity within these alternative trading systems off exchange, stock exchange rebates, and information leakage from stock exchange proprietary data feeds. With that said, we agree with SEC Chairman Atkins in his recent assessment concerning Reg NMS.
▶ 0:25:43Last December he stated, "Reg NMS built on flawed foundations has invited gamesmanship and contributed to the fragmentation of our markets, the dispersal of liquidity, and diminished Reg NMS contains many flaws. There's no question about it. But the fact is removing Rule 611 is not the way to do it.
▶ 0:26:06Reg NMS we must be very careful about how we fix Simply eliminating the order protection rule will not solve any of the problems that I just talked about. Fragmentation will continue, off exchanges will continue to grow their share, segmentation will continue, and stock exchanges will continue to have rebates with 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.
▶ 0:26:33Allowing trading of tokens without the explicit consent of the underlying public companies and without conferring voting rights or dividends is dangerous. It mimics the shady unregulated bucket shops of the past. It will fuel fragmentation, distort true price discovery, and severely damage public investor confidence. This brings me now to rule 610, which is not as exciting. The stock exchange MEMX recently requested exemptive relief to delay the implementation of lower access fees.
▶ 0:27:04They claim that the industry needs more time to see what happens with rule 611. We strongly disagree. The industry already debated this issue. The SEC approved the access fee reductions. The DC Circuit Court of Appeals upheld the reduction in these fees against these exchange lawsuits. There should be no further delays. The amendment must go into effect in Next, let's talk about the consolidated audit trail.
▶ 0:27:31Born after 2010, the 2010 flash crash, the CAT, as we call it, has been fiercely attacked by industry participants. It's true that the self-regulatory organizations who govern it did a terrible job managing the rollout and controlling the cost. They overspent by hundreds of millions of dollars building the CAT.
▶ 0:27:52But despite its flawed implementation, the CAT is finally fully operational and has proven to be a vital regulatory We are very concerned by ongoing pressure from some market participants, and even some members of Congress, to strip out the data of the CAT, which will likely hamper and delay any further SEC investigations. Sure, maybe the CAT could use some less options data, but maybe it needs more trader information to link the related accounts.
▶ 0:28:18After all, the point of the tool is to potentially identify market events and insider trading. Finally, trust and confidence in markets are not optional. They are absolute necessities. Recent troubling reports regarding irregular trading across equities, futures, and prediction markets continue to erode global trust in US systems. To police these markets effectively, the SEC requires robust tools like the CAT, adequate staffing, and institutional will to prosecute market abuses.
▶ 0:28:48The US equity market appears to be deep and liquid, but still has many underlying conflicts which compromise price and liquidity discovery and could result in a rapid deterioration of liquidity like we experienced during the flash crash of 2010. Rather than eliminating the trade through rule, delaying access fee reductions, and continuing to weaken the CAT, the goal of market structure reform should be to encourage more displayed liquidity, which will level the playing field for all market participants and dampen volatility.
▶ 0:29:15Thank you and I look forward to your Thank you, Mr. Slutsky. We'll now turn to member questions and I recognize myself for 5 minutes for questioning. Since commission-free trading became the industry standard for retail investors in 2019, we've seen a significant jump in the number of Americans participating in our capital markets.
▶ 0:29:40Main Street investors directly benefit from markets that work with their interests in mind. Mr. Billings, can you touch on the importance of tailoring equity market regulations to ensure that more Americans can build long-term wealth through Thank you, Chairman Wagner. Uh you are correct.
▶ 0:30:07I think there was a recent Gallup poll that said 62% of Americans are invested in the marketplace, um which is a nice increase over the course of just from several years ago. And yes, for retail for retail, which is, you know, our goal from is access and investor protection.
▶ 0:30:27And that access is through intuitive, simple platforms that demystify investing, allows them to engage in the There is access to 24-hour markets if they so choose to invest at a time that makes sense to them and that is more that so they don't need if they're not available during market hours or if there's a time that is more uh flexible in investing, they have that opportunity with that. And another big pillar was notional investing.
▶ 0:30:57Notional investing or fractional investing, which allows somebody who has you know can't buy full shares of something, you get to buy fractional shares of something. You get to put forward in recurring investments of X number of dollars over the course of any particular weeks or something of that All of these are tools to let the retail investor engage in the marketplace in the way that they want to engage in the marketplace in the way that they can engage in the marketplace and it's not intimidating to them and
▶ 0:31:27they get an opportunity to be part of our capital markets which as we know have proven to be a great wealth generation tool. So, deep liquidity and a robust investor base are essential to attract new public offerings on US exchanges. Thankfully, our markets remain world-class and continue to facilitate access to capital for entrepreneurs both large and small. Mr.
▶ 0:31:54can you explain why equity market structure is so intrinsically tied to capital formation? Thank you for the question, Chairman I think it all stems from the foundation of capital formation, which was in your question. And if you think about capital we want to lower the cost of capital for companies that need to grow and develop and innovate.
▶ 0:32:21And to do that, you need a really strong secondary market. One that is super liquid, attracts all investors, has institutional guardrails keeping those investors safe, has the transparency that we that we see in the securities information processor that was brought up earlier in some of the opening testimony. And price discovery, so you know what you're investing in, what it's worth at that moment in time.
▶ 0:32:49And that's what will bring the public markets back and continue to stay with the United States.
▶ 0:32:55And how would updating Reg NMS make our markets more attractive to companies seeking to go public? As long as we know there's trust, and that's that's another word that's come up so far today a few times. As long as there's trust in our markets, you will attract capital. If you attract capital, you do that through NMS.
▶ 0:33:13You need to have the right structure because if you change the wrong thing in Reg NMS because you want to cater to one asset class or one institutional base, you risk ruining ruining what we know we've I'll say it 40 times today. We are the envy of the world. We have the best markets in the world. And if you're not the growth that we have seen in the last 3 years with this new SEC SEC administration, we're up 14.4% in options and 20% a year over the last 3 years.
▶ 0:33:41We're seeing equity options volume go through the roof. We're seeing our equity our equity volume is 20 billion shares a day now almost in in 2026. It was 12.2 3 years ago. So, doing those very things will continue to attract capital. Market structure is admittedly a complicated and niche area of financial regulation. However, the rules in Reg NMS filter all the way from the exchanges on Wall Street to individual investors trading on their phones.
▶ 0:34:09That's why getting the the right rules of the road in place are so very important. Mr. Billings, your testimony highlights several issues including exchange proliferation, increasing compliance costs, and the need for more transparency. Ultimately, how do retail investors, mom-and-pop investors saving for their future, How do they benefit from the proposed reforms we're talking about here today? Oh, and I am out of time.
▶ 0:34:40I hate when that happens. So, you are going to have to answer my very eloquent uh question in in writing. I and I appreciate that. Uh next, I recognize the ranking member, Mr. Sherman, for 5 minutes for We've got the deepest and best capital markets in the world. Drug dealers would like to invest. The various actors would like to invest.
▶ 0:35:09And they're also the best markets uh for those who want to engage in insider Uh Mr. Sal uh Saluzi, um if we go with this uh granting of exemptive relief for tokenized would that allow those who uh acquired their capital through, say, drug dealing to invest?
▶ 0:35:33And would it allow someone with insider information, they wouldn't even have to have their brother-in-law make the trades. They would just make the trades, and we'd have we we'd know that somebody bought the stock an hour before the announcement, but we wouldn't we'd never know who. Thank you, Congressman. Um I think it's extremely dangerous to start um tinkering with the best, deepest, liquid markets in the world, as we've all said, and we all agree with.
▶ 0:36:04And I go with the principle of do no harm first. And if you are going to change things, we need to see a cost-benefit analysis as to why these changes are necessary, and who are they to benefit, and who where where are the risk? So, I think what you're talking about are the risk of potentially creating this tokenized market, which we keep hearing about, and there's a number of ways that the SEC can propose. We have yet to see the proposal.
▶ 0:36:27And what we're hearing that it might be coming this week with this innovation exemption, but there is some very, very dangerous ways of doing that that could create, as I mentioned in my opening statement, electronic bucket shops. They could be 1, 10, 500 different folks trading these basically our stocks, but they have nothing to do with dividends and voting rights or anything like that. They're trading in a little side room. So, let's be very careful on how that goes about.
▶ 0:36:52And I'd point out that this divorcing of voting rights from share ownership uh is an ongoing theme among those who want to eliminate proxy statements, proxy statement advisers, not allow shareholders to put measures uh before uh their fellow shareholders, uh all in attempt to vest power uh not in the capitalists who should control the capitalist system, but rather in executive management. Um Mr.
▶ 0:37:19Canady, on Monday Bloomberg article uh reported the SEC is uh preparing a significant innovation exception that would allow investors to trade stocks on DeFi networks without those networks having to comply with all the guardrails and securities laws to protect uh investors when they trade on mainstream stock uh markets uh such as Nasdaq. Does Nasdaq think that an exemption uh like this is in the best interest of investors in the capital markets?
▶ 0:37:49Does Nasdaq uh think it's appropriate uh for the SEC uh to front-run uh ongoing bipartisan efforts here in Congress uh and make the laws themselves rather than wait for Congress to do it. Thank you. Ranking Member Sherman. One of the benefits of being in this business across five decades is I've learned to not overreact, especially when something is just in the press.
▶ 0:38:13I do want to state that working with this SEC has been, dare I say it, almost a master class in transparency and collaboration. But that said, I want to give you an answer to your question. I don't know what's going to come out with an innovation exemption, but I can tell you the things that are important to Nasdaq. Investor protection is number one.
▶ 0:38:32Institutional grade guardrails, and you're seeing us working with the industry building them for always-on Working and engaging with corporate issuers is exceptionally important to As is transparency and the securities information processor.
▶ 0:38:51I need to reserve judgment until I actually see an innovation exemption, but I can state on the record that those are the things we'd be looking for and I'd be disappointed if they weren't in Thank you, Mr. Salcito. What are some of the risks to investors and the markets if we create a two-tiered market where tokenized securities and on-chain platforms are from core securities regulations where the rest of the market, of course, is subject to those requirements.
▶ 0:39:21Tokenization could There could be a benefit if you do it the right way. So, and there could be a potential if you're doing it if infrastructure and plumbing of the stock market. Can we improve clearing? Can we improve settlement? There might be a way of doing that with the consent of the issuers. Where you will have a problem is if you have these side rooms going on where you have a dislocated price. And this actually goes on now.
▶ 0:39:44There are certain crypto places where you can trade stocks even before they're public, but you're not trading the stock, you're trading a derivative, a synthetic, whatever you want to call it, but it has nothing to do with the security itself. So, you need to be careful there as to what how is the price being generated. There's all sorts of dislocations and potential arbitrages that could happen that could not be good for investors. Gentlemen's time's expired.
▶ 0:40:11The chair now recognizes the chairman of the full Financial Services Committee, Mr. Hill of Arkansas for 5 minutes. Thank you, Chair Wagner, and thanks for our panel for helping us sort through this issue of how technology is so changing our markets. Uh we've been talking obviously you've had a lot of conversations about Chairman Atkins' issue of calling the order protection rule a misnomer that it actually encourages market fragmentation.
▶ 0:40:42That's his assertion. If the Commission were to rescind 611 as you've talked about today, could a strengthened data-driven FINRA best best execution standard provide better outcomes for retail investors by looking at speed and fill probability over a narrow sort of top of book price. Who wants to tackle that? Matt, you want to tackle that? Yeah. And then Mr. Kennedy, maybe. Uh thank you, Chairman Hill.
▶ 0:41:15with 5310, the FINRA 5310, the answer is it's yes, it can. I would And we like the fact that it's a principles-based regulation, and protecting our customers in the way we have we have an approach with best execution at Robinhood, and it's a very robust and process-driven approach.
▶ 0:41:42And it exists today, and it'll exist tomorrow with or without rule 611. And we And if 611 were to go away, that's absolutely fine. The retail customer will be protected. It is very strong in the processes that we have driven today, and it starts out with daily exception processes, and it goes into, you know, dashboard reviews, and every review every order type, and every session that we're active in.
▶ 0:42:09So, we are confident that investor protection will continue to be at the will continue to be very very strong. If FINRA were to reinforce it, that's absolutely fine. During the course of the over the I mean, FINRA rule has FINRA rule has to the test of time and during the course over years they have sent out reg notices every once in a while just to kind of reinforce a particular point or something like that. So, we would suspect that would not be unlikely that there would be an ask of FINRA to kind of reinforce 5310. We'd welcome that.
▶ 0:42:38We're happy to oblige by whatever direction they take this in, but we are confident that 5310
▶ 0:42:42Mr. Kennedy. Mr. Kennedy, you want to opine on that? Thank you, Chairman Hill. I want to make sure I answer your question correctly, but it's really about the repeal of 611, 610 and the and what's going to happen in the markets. And when we first got wind that that 611 would be considered to be removed we were sort of agnostic. However, where we're not agnostic is that the reason that 610 exists is because of 611.
▶ 0:43:10And it all comes back to capital formation, price discovery, all those things I talked about initially because we need liquidity. So, we we don't love the change. Again, we're largely agnostic, but what we did was that this SEC under Chairman Atkins wanted to be transparent, wants to move the markets, wants to modernize, and we as operators as the largest pool of liquidity in equities we need to work with our regulators.
▶ 0:43:38So, we are open and we've said this on various panels and we've told the chairman and we've told Jamie Selway, we're open to the modernization of it. What we'd like to see is then remove the access fee cap so we can compete with the rebates because the access fee cap drives the rebates. And we've talked ad nauseam about the value of rebates. They're transparent. They tighten the markets. We see it quarter after quarter the markets getting tighter and they attract capital. So, we want to advance markets. We want to modernize. We want to do it with the Mr.
▶ 0:44:08McKenzie, um sort of on the same theme of best execution depends on a kind of a 1970s set up technologically. And since I started my career in the securities business in 1973 typing confirmations with carbon paper, I know a little bit about the 1970s 50 years later.
▶ 0:44:28But how do industry participants be legally required to purchase, you know, the public SIP data and claim to prioritize best execution when you're dependent on that system? We do need to modernize, don't Thank you for the question.
▶ 0:44:44Um first off, you know, the PTG as reflected in the testimony does believe that the multifactorial analysis in the FINRA rule 5310, looking at the size of the order, the depth of the order book, a number of factors is a more holistic measurement of best execution. Um and we do feel that in the absence of rule 611, that standard would be pretty positive.
▶ 0:45:10On the data side, this might get me in trouble, but the one market structure rule that was finalized from the Gensler proposals was pretty positive. It was rule 605 modernizing that data. That is helpful. And in the new system, if rule 611 is repealed, we would expect uh 605 data to be helpful as well.
▶ 0:45:31Thank you so much. Madam Chair, I yield back. Thank you for this hearing. I yield back. The chair now recognizes the gentleman from Illinois, Mr. Casten, for 5 minutes. Thank you, Madam Chair. Uh thanks all of you for coming. it it's always struck me that investor protection in general is sort of a three-legged stool. You've got You've got the rules as far as who can participate, under what rules can they disclosure requirements that I guess are a subset of those rules, but you know, with certain disclosures you could be exempted from certain rules.
▶ 0:46:01And and then of course robust enforcement of all of those. Um Um I I have concerns that you know that Chair Atkins is talking about repealing or or at least weakening the order protection rule. And I guess Mr. Saluzi, I I guess I just just very briefly from you, let's assume they were to eliminate it.
▶ 0:46:19Do you think we can still provide robust investor protections with some enhanced level of disclosure you know and/or enforcement or it it is is any elimination of that rule just going to lead to less protected I thank you for the question. It will lead to less protection. The the sanctity of the NBBO, which is the national best bid and offer, is critical for this market to function. And that's what rule 611 protects. The NBBO is how people price off exchange trades.
▶ 0:46:50So they look for the best bid and best offer. A lot of times it's in the middle of the spread. It's also how you measure your performance against the NBBO. If you start to weaken that, you will weaken confidence. You will weaken trust. The please you know if you got more thoughts share them cuz I'm I'm in agreeing with you there and I'm I'm particularly concerned with the zero commission brokerages because of those conflict of interests within the brokerage house. Mr.
▶ 0:47:15Billings, when your CEO was here back in 2021, he testified at the time that 100% of your market makers had had payment for order flow con- contracts. And further that because of that there was there was never an effort to go and say is there a better price available from someone who we don't have a PFOF agreement with. Is is it still the case that 100% of your book is is under PFOF The market makers you deal with? I'm I'm not sure what you're saying from a PFOF contract perspective.
▶ 0:47:43Are you saying do we do we accept payment for order flow
▶ 0:47:46of your market makers, so you're you're paying zero all of your customers are paying zero commission. And then 100% of your market makers, at the time I think you said there were six market makers that represented 100% of the other end of your trades. Yeah, Robinhood does receive payment for First of all, thank you for your question, Congressman. Uh Robinhood does receive payment for order flow, and it is equal and is uniform across all of our
▶ 0:48:10Yeah, and he and he and Mr. Tenney had testified as much before, but that then raises the question of you may be the most ethical person in the world, but you you your firm is making money off of the payment for order flow, not off of best execution for your clients. So, the best execution obligation is only such as the regulators enforced on you or from the good of your own heart. I agree I assure you, Congressman, that best execution obligations are our primary focus.
▶ 0:48:36I'm not I'm not accusing you of being immoral. I'm just saying that in the absence of those rules, your economic incentives I mean, this matters because you've been fined multiple times by for violating best execution. Um so, it's a little hard to say just trust us this time around. Yeah. You you have a conflict of interest in the model. I'm not saying you abuse it. I'm just saying we need to acknowledge that there's a conflict of interest. the Chair Atkins has also indicated that he wants to provide an exemption from Reg NMS for tokenized securities.
▶ 0:49:04Um we've seen significant price differentials between real equities and tokenized derivatives of those equities in recent times. Robinhood um was scrutinized last year for offering tokens in OpenAI and That was done without those companies' approval. Mr. Billings, it's my understanding that Robinhood is not currently offering tokenized stocks, and that you've said it's incompatible because of their decentralized nature.
▶ 0:49:28Is it still your position that tokenized securities don't fit within the existing So, within the with domestically, Congressman, it's our position that waiting and seeing what's going to happen with the innovation exemption that is eminent with with this to
▶ 0:49:43But but I'm I'm not asking about what might happen in future rules. Is Is it your position that you can't offer tokenized securities consistent with existing protocols? Existing regulatory
▶ 0:49:51I mean, the SEC has made it clear that a tokenized that security in its tokenization in a tokenization form is still a security. So, you would think that the same rules that would affect them in its current state would affect them in that future state, but we will wait for the innovation exemption to see how that turns out. We do think tokenization has value in like a real world asset scenario and there are some things that tokenization does add value with in the way of
▶ 0:50:16so just just to be clear, I agree with the SEC that a tokenized security is still a security. I would note that the Clarity Act that passed out of this committee said it's not. That suddenly it magically becomes a commodity. And if indeed we pass that law, we're going to have a huge problem. Mr. Kennedy, do you think the tokenized security should be regulated differently by different regulators depending on what platform they're offered on?
▶ 0:50:42Tokenized securities, the way we file them, they're regulated by the SEC and they provide the guardrails that we're bringing we're bringing tokenized securities into DTCC, into the Securities and Exchange Commission. So, that's our approach. Gentlemen, time's expired. I'll ask you to respond in in writing any any further. And uh the chair now recognizes the chair of our task force on monetary policy, Mr. Lucas of Oklahoma for 5 minutes.
▶ 0:51:08Madam Chair, before I begin my questioning, could I submit for the record by unanimous consent a letter from the Security Traders Association? Thank you, Madam Chair. And thank you to our witnesses for being here today. Dr. Patola, let's pull back up to the 30,000-ft level and start with an overview of where we are now. 21 years after the SEC initially adopted regulation NMS, our equity markets are deeper, more liquid, and serve investors better than ever before.
▶ 0:51:36What aspects of our equity market structure need to be preserved at the as the SEC contemplates improvements to regulation NMS? You, Doc. Sorry. Sorry about that. back So, I was around with the original discussions back in the 2000s. Certainly even then the trade-through rule was not needed. We didn't need to be regulating fees. And uh I believe that still today.
▶ 0:52:06The one rule that I found a So, so certainly exchanges need to be compensated for their data. The Security Act amendments took something of value from the exchanges and gave it to the rest of us. They need to be compensated. The market data rule's the way that happens. I believe there's problems with the way the data rule allocates. It could be worked on.
▶ 0:52:27The other thing that I think is useful to keep is some On a given exchange, you want limit orders to have meaningful So, if I step up and and willing to trade, you want them to get rewarded for that. So, you don't want to let somebody come in like on Price is Right and better their quote by .0001 cents. So, those are Those are the two things I think have some value. Turning to you, Mr.
▶ 0:52:53Kennedy, rule 611 is linked with many other Reg NMS rules. From your perspective, what spillover effects should the SEC be mindful of as it considers the changes to 611? Thank you, Congressman. I think for certain the number one thing I would think about is whether we're going to preserve the price discovery and the liquidity that we've all become so used to.
▶ 0:53:19And that is clearly the the most I'd say in the flood plane of any change there. So, as long as 610, the access fee, is is unchanged or removed, then I think we're in a good position to continue the markets the way we have them today. And I think there's still constructive things that we could do to work with the commission, but we clearly have to remove what was attempted to be done in the last administration or you will have unintended consequences that are Mr. McKenzie, what is your viewpoint on the same question?
▶ 0:53:49What rules may need revisiting should the SEC propose rule changes to I think you'll hear a common refrain across the board from all the witnesses at the table that the rules of Reg NMS are interconnected and specifically rule 610 and rule 612 uh would need to be modernized at the same time that a 611 proposal were to move forward um because in the event that uh changes are made in a piecemeal approach,
▶ 0:54:19you could see dislocations as a result of the interconnected nature of these things and the locked and crossed market prohibition in 612 is a strong candidate for that given the the modernization of the markets as they exist today. Mr. Billings, as the industry transitions to faster settlement cycles, we note significantly reduces counterparty credit risk and default However, there are operational risk.
▶ 0:54:46How should regulators be thinking about balancing those benefits and risks? Thank you, Chairman. So, there is this an advantage with tokenization in the fact that there is that immediate settlement with that and as as tokenization evolves, we'll see how we can speed up settlement cycles and Robinhood is advocating for a T0 regime. But, let's slow down a little bit.
▶ 0:55:17When we went from T+2 to T+1, that was over a year's effort to organize and coordinate this effort and we went to T+1 in Memorial Day of Memorial Day weekend of 2024. And it was an amazing uh accomplishment of the industry, kind of a high point of that year in the fact that it was such a significant change.
▶ 0:55:40And it took such amount of effort to get to that point that if we take that next for industry-wide global settlement, it takes the same kind of effort of coordination and making sure that everyone can be operationally safe in how we approach it. So, even though tokenization offers an experimental lens to it, industry-wide it's going to take a tremendous effort to be able to shorten the settlement cycle further. Thank you. And with that, Madam Chair, I yield back the balance of my time. Gentleman yields back.
▶ 0:56:10The Chair now recognizes briefly the ranking member, Mr. Sherman. I ask you, Madam, if consent to put into the record a statement for by Tyler Yelash of the Healthy Markets Association designed for this hearing. So ordered. Chair now recognizes the ranking member of our task force on monetary policy, Mr. Vargas of California for 5 minutes. Thank you very much, Madam Chair, and thank you, ranking member. And of course, thanking all the witnesses.
▶ 0:56:39One of the problems when you go sort of last here is that all the good questions have been asked. And but also one of the benefits is that you did get to hear the testimony. So, one of the things that kind of sprung out to me is that when uh Reg NMS was created back in 2005 to make sure that the market worked fairly well and was fair and that people had confidence in it, that the core architecture basically worked. It basically it created a better system.
▶ 0:57:07And now the system is being challenged mostly by technology. And that way we should take a look at it and and change it. And again, the testimony was if you're going to change it, don't change it just piecemeal. You can't just take one little thread out because as they say, you take one thread out of the arm and your arm falls off your suit. So, instead you should take a look at it at a systematic way. Um Mr.
▶ 0:57:30Kennedy, it was in very interesting when you were asked a question about the market, you said something to the effect that capital formation, you really need this really and I I want to generally quote you. I don't want to misquote you, but I generally the what you said was you need a really strong secondary market, liquid, transparent, know what you're investing in, have confidence. And I think that that has happened up to now generally generally. And you have to have then you said trust in the market.
▶ 0:57:57So, it it does seem that when you start making these changes that are being forced, you have to maintain these things. You have to maintain the trust in the market. And that means full transparency. And and unfortunately, you do see now a little bit of distrust cuz it does seem like some things are happening off the market or in other ways that that people are distrustful. So, how do we maintain again a market that is deep, trusted, and one that people will invest in and at the same time modernize it?
▶ 0:58:27Mr. A very sincere and to the point question and I I love it because we are seeing it, right? We you turn on the evening news and there's some story about something. So, I think you really have to bring it down to the core three things that I think Nasdaq or I know Nasdaq believes, but I think we all can agree on, which is investor protection through integrity, because nothing if if you don't have liquidity, you have nothing, you have no
▶ 0:58:57price discovery, and trust. But then your question, Congressman Vargas, was okay, how do we do it? And I'd say you have to trust that you have this in the core. We've built these institutional grade guardrails since long before NMS, honestly. They were flawed when I started 1987 until the Brady I think it was Nick Brady was the head of the SEC, put in the original circuit breakers, but the truth is we have an incredible core infrastructure today in our bowling lane.
▶ 0:59:26We need to work from that out, not from the outward back in. That makes sense. However, you it's interesting one of the your written testimony you say something I found very interesting your your second point. At the same time exchanges need to be able to compete with more effectively with dark, non-transparent off-exchange venues which have gained in popularity to capture on average roughly half of all trading volume in the United States equities on any given trading day.
▶ 0:59:55And then you go on to say other things. It does seem then that Okay, so you speak of this core that you have to maintain, but it seems like a lot of things are going out going on outside of that core that people are participating in. Yes, yes, but they're on the SIP. They're transparent. They're under the SEC. They have the guardrails. They have the same rule set that we have.
▶ 1:00:14And in fact, with always-on trading that we're building out to begin on December 16th, we are actually bringing that globally and today we're open 16 hours, we're going to be open 23 hours with those same rules. So, as frustrating as it is at times to see things trade off-exchange, they are within our core infrastructure. And just a side note, when the markets move a lot, everything goes back on exchange because we, all of the exchanges, are the port in the storm because we are the core.
▶ 1:00:43And you'll see days where we're 60, 65% because everybody needed liquidity. And that's a great demonstration of what may happen if you continue to let it just leave the building, so to speak. I had a couple other questions, but they've already been asked and answered and I want to don't want to delay it. So, I will yield the rest of my time and thank the chair. I appreciate that, Mr. Vargas. Thank you very much, and I now recognize the chair of our subcommittee on National Security, Mr. Davidson of Ohio, for 5 minutes.
▶ 1:01:11Uh thank you, Dr. Battalio, Warren Davidson from uh MBA class of uh 2005, so plus uh 20 years. Uh I remember you fondly and uh, it was a good class. Uh, there's a lot going on in capital markets back then. I think one of the things we were studying at the time was the New York Stock Exchange potentially being publicly traded. So, our capital markets have remained dynamic. Uh, they're the envy of the world.
▶ 1:01:37We've got, you know, half of the world's capital invested in them. And you know, we're here talking about ways to keep them vibrant. When you look at uh, you know, demand, your guy sitting right next to you, Robinhood has done maybe more uh, to attract retail investors than just about anybody and we down as you know, intrigued by the conversation about tokenized securities and you know, if you look at real-time settlement, you know, uh, possible instead of netting.
▶ 1:02:06I don't know that I like that or if it's a real improvement. Um, but if you look at the the ability of a blockchain, you know that you can't have uh, you know, anything but put-call parity if you do that. You can't have pledges hypothecated on shares. So, so it solves a lot of problems. So, when we look at um, you know, the topic for today, Rule 611, Professor, what should we be paying attention to?
▶ 1:02:31I think we should step back and think about do retail the the market for retail order flow has never been more competitive than it is. Right? The wholesalers, so if you if you look at the Rule 605 reports that got mentioned earlier today, they document a certain amount of price improvement that get provided back to people like Robinhood. If you look at the other dimensions that aren't currently captured by those reports, the value proposition increases to 650% of what's actually reported.
▶ 1:03:00To me, that tells you how much the competition and the broker vigilance is forcing the people who execute trades to give back. So, in my mind, trade-through goes away, doesn't affect the retail investor at all. What might it do? It might help the wholesalers who provide executions do so more effectively.
▶ 1:03:19What shocks me is the SIP collects information from disparate places and in recent work I have you can show that when stuff gets broadcast, reactions to trades get reported before the trade itself. And that's being published as the NBBO used to benchmark everything.
▶ 1:03:38So indeed, people who have to die 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. And so, you know, I I I think institutional investors can take care of themselves. I say do away with the trade-through rule and put the access fee into quotes so that the market participants see the net price of trading. Institutions already do this. Thank you so much. Appreciate it. You know, Mr.
▶ 1:04:08McKenzie, uh you know, when you think about 611, you think about, you know, just or listen to Professor's response there, you look at there's a whole exchange that basically runs by limiting trade speed.
▶ 1:04:22You know, just a just a little bit of lag by creating a long spool of cable so that it covers the you know, creates a little bit of Um and you know, because people truly believe that there's a dynamic at risk here where people are are not getting best execution, that they're not getting uh a fair shake in the market. So how do we address this and and provide consumer protections and have a fair market? Thank you.
▶ 1:04:48Uh the aspect of that particular exchange and what they're bringing to the market is a sign of competition. It's an innovation. the position of PTG is that a repeal or rescission of 611 would force exchange competition.
▶ 1:05:08So it would it would hopefully reduce the 17 exchanges that exist now and that capture a fair amount of revenue including the very low trading revenue exchanges capture 31 times their trading revenue in quote revenue generated via the SIP that market makers like Optiver and the PTG members have to pay for. Yep. Thank you. Thank you for that. And you know, Robinhood, you guys are there with customers every day. We'd love to get rid of the accredited investor rule. It's not yet unanimous, so I can only speak for myself.
▶ 1:05:38Uh there are some colleagues that would like to and then retail could really do it. But at the end of the day, people feel like we have to protect consumers because there has been fraud in the market. There has been people that have gained the system and used it to profit quite a lot. How do we do that to make sure that the retail consumers are getting the best best execution? Are you referring to the public markets or private markets when you mentioned accredited investor rule?
▶ 1:06:05Well, I'd like to get rid of it across the board, but I know you you're trading public markets unless you've got another pool that I don't know about. thank you. You know, you know, the the focus here is just having surveillance systems that you need that you're active and you're attacking and paying attention to the activity on your platforms. You see you know, odd activity. We have teams that are monitoring the markets and we
▶ 1:06:27has expired. Your time has expired and I I'd ask you to respond in in in writing. I thank you. The chair recognizes now the ranking member of our subcommittee on digital assets, Mr. Lynch of Massachusetts for 5 minutes. Thank you, Madam Chair. Mr. Saluzi, you write in your testimony that uh we hope the SEC is not considering the elimination of rule 611 because it potentially stands in the way of their quote innovation exemption and tokenization plans.
▶ 1:06:56I think that's exactly what's going on here. Uh you will also go on to say that allowing the trading of tokens that do not have the consent of of public companies that they track and do not confer voting rights or dividends would be akin to permitting trading in a shady unregulated bucket shop. I agree.
▶ 1:07:18Uh you want go on to say that this would be a grave mistake which would distort the price discovery process and undermine investor confidence in the market. That's That's what I worry about. Uh as as Mr. Davidson said, we've got robust markets. We've got a great reputation for integrity. I think it's because around the world people see these markets as fair. Fair and orderly. What does the elimination of of 611 do to all that?
▶ 1:07:48If if you can if if you can game the system, if if if you're not giving someone the NBBO I mean wouldn't that undermine your faith in the markets itself? I mean it it would to me.
▶ 1:08:06And and it's always been a you know, a a ground truth in the markets that you get the best you get the best price and you talk about this and and about the undermining of investor confidence that might result if we get rid of 611. That's not innovation, by the way. That's not innovation getting getting rid of you know, uh the trust that's in the in the Thank you, Congresswoman.
▶ 1:08:35And yes, I agree and and I still don't understand why the elimination is even on the board. And we do have a best execution responsibility, as Mr. Billing said. That that overrides everything. 5310 FINRA rule, that is my responsibility. But that NBBO is also, like I mentioned before, so sacred to this market because we do price merchandise off of that. So there are ways to fix 611, if you may. Because right now we have 17 stock 10 of them have 1% market share or less, and these are all protected quotes.
▶ 1:09:04So, as my fellow panelists have said, they have to pay to access these exchanges. So, one suggestion would be to limit the amount If you have a stock exchange, let's just call it 2% market share or less, you are no longer a protected quote. That's one suggestion that's been on the table, which is a good suggestion. The SIP revenue formula, which has been mentioned also, is a a relic of the past. But, there's an exchange out there. It's called Now, it's the New York Stock Exchange Texas, but it used to be called the New York Stock Exchange Chicago.
▶ 1:09:31It has a half of 1% market share in 2024 is when they had the numbers on it, and they collected 12% of the quote trading revenue, which was about $18 million. And that doesn't make any sense, either. So, you can change the quote trading formula. You can limit the amount of exchanges that have protected access. And also, I would add depth of book protection to 611. Do those three things, and you've made it much better, and you don't need to eliminate 611. There's no need to. Right.
▶ 1:09:58You also talk about uh access fees and rebates, which are at the heart of uh almost every decision that an order routing algorithm makes. Uh could you talk about the reasons of lower lowering what how that might help uh the situation if we lower those access fees? Sure. I guess it reduces the incentives. Yeah, the right the way the stock exchanges are set up now, everybody it's a maker-taker model. So, when you post liquidity, you get a rebate. When you take liquidity from an exchange, you get you pay an access fee.
▶ 1:10:28Access fees are around 30 mils cap right now. Rebates tend to be up around 27, 28 for the big guys, and even more. So, the spread captures about two mils two mils for the exchanges. You can lower those access fees, which what the SEC already approved and the courts upheld, to 10 x to 10 mils, and the exchanges will lower the rebates probably down to around seven or eight.
▶ 1:10:48Exchanges still make the same amount of money, but what you're doing is you're lowering costs for institutional investors who want to access that quote through their brokers like myself, which would be benefiting the institution. So, I don't know anybody who's against lower fees, and these are lower the the SEC said, "Let's lower the fees. Still maintain a cap, but let's lower the fees." So, in our opinion, that makes total sense. I don't understand that the exemptive relief request is getting so much action right now from the MEMX request.
▶ 1:11:15So, if it was up to me, I'd say, "No, they they go through at 10 mils, which is what we approved, and let's and it's not, by the way, it's really not difficult to do. Exchanges put through exchange fee changes dozens a year. It's not a very difficult process. Thank you. Uh thank you, Madam Chair. You back the balance of my time. Thank you. Gentleman yields back. The Chair recognizes the gentlewoman from in our gentleman, pardon me, from Indiana, Mr. Stutzman, uh for 5 minutes. Thank you, Madam Chair.
▶ 1:11:44Uh first of all, I'd like to submit uh a letter for the record from the American Securities Association. They submitted comments uh for the scheduled hearing today. So ordered. Thank you, gentlemen, for being here. Uh over the last 21 years, Hoosiers have greatly benefited from the highly competitive equity markets underpinned Reg NMS.
▶ 1:12:07Market innovation has allowed for efficient price discovery, reliable investor access, accurate quote handling, and orderly clearing and settlement. The number of Americans participating in our equity markets is near an all-time high, and Americans are accessing these markets earlier in their lives, including my 24- and 20-year-old sons. That said, just because the system is working well doesn't mean there aren't improvements to be made.
▶ 1:12:34I'd like to begin by discussing the SEC's trade-through rule. Chairman Atkins voted against it as an SEC Commissioner in 2005, and has made reforming or eliminating it a priority as Chairman. Uh Mr. Billings, I'd like to ask you, um Robinhood has built its business around providing everyday Americans with increased access to financial markets. If the SEC updated or rescinded the trade-through rule, how would that affect your ability to deliver on that mission for your customers?
▶ 1:13:04And what sorts of benefits would investors in my state see? Great. Thank you for your question, So, the focus here is always on investor And with the elimination of 611, and keep in mind, when we eliminate 611, we do want to have a comprehensive review of all NMS rules, including 610 and 612.
▶ 1:13:28So, if we're doing this, we want to be cautious about a strict elimination because removing 611 without thinking about 610 will have impacts on the market and maybe market integrity with that. But, in removing 611, and Mr. Slusare raised some good points there, there are over 10 exchanges out there that have less than 1% market share. Okay.
▶ 1:13:50So, if we were to remove that, and if there was going to be some consolidation or something that went and there were fewer exchanges that existed tomorrow than there are today, that is less connectivity that people have to pay for, less market data fees people have to pay for. And although Robinhood doesn't access these exchanges directly, we go through market makers to do that, the market makers would have a cost savings as a result of this. That's a positive to them. And then, what do we do in response to that?
▶ 1:14:17We continue to drive competition with our market makers on the execution quality front. So, if there's a savings to them, we try to get some of that back into our customers' pockets by continuing to drive best execution for our clients. All right, thank you. Um, Mr. McKenzie, I'd like to follow up to that. Those opposed to this rule have claimed that trades would no longer be executed at the best price. But, isn't it true that broker-dealers would still be required to pursue best execution under current FINRA rules?
▶ 1:14:47And let's say the SEC rescinds rule 611. Yes, it is and you can understand the FINRA rules maybe as price plus. Price is still a component of best execution under FINRA rule 5310, but it also examines size of the order, the depth of the order book, speed of execution, the likelihood of execution, the costs associated with execution both both explicit and implicit and any information leakage.
▶ 1:15:15And so understood in that context in the absence of 611, FINRA rule 5310 acts as a real comprehensive backstop to provide for best execution and you know, to to build on um Mr.
▶ 1:15:29Billings' point, PTG is a community of market makers and you know, as the testimony demonstrates, our our members pay connectivity fees, market data fees, membership fees, we pay costs associated with clearing, testing, surveillance and compliance and these are things that we pay to every exchange. That's the business model is to be present providing two-sided liquidity all day long and that's we compete with each other to uh fill those trades.
▶ 1:15:58So, a reduction in the number of exchanges that could result from the repeal of 611 would be beneficial to us and as a result to end investors. Would would other aspects of our market structure regulations would need would they need to be modified in Yes, so um rule 610 has has been discussed, rule 612 has has been discussed because all of these rules are really woven together and interconnected. So, in any rule making we would hope that the SEC would examine the holistic view of all of these rules and how they fit together.
▶ 1:16:28All right, very good. All right, thank you Madam Chair, I'll yield back the balance of my time. Chairman Neals back. The Chair recognizes the Chair of our Subcommittee on Digital Assets, um Mr. Steil of Wisconsin for 5 minutes. Thank you very much, Chair. Thank you for holding today's hearing. Let me follow up on where Representative just was. Come to you, Mr. Kennedy. If I can, in your testimony, you discussed the importance of responsible innovation and guiding transformation growth in our capital markets. But, I want to dig into the 24/7/365.
▶ 1:16:59And what is the architecture that's really needed? What is needed to be overhauled? And in particular, from a risk management perspective, in many ways from a technical standpoint, you can trade 365. But, what is What is the um the operational resilience? What is the risk? And in particular, you noted I believe that you said that there might be like an overnight technical pause might be helpful when trading volumes are low.
▶ 1:17:28Could you flush that out a little bit for us? Sure. Thank you, Congressman Steil. Working with the industry on resiliency is core. This is where we actually we compete like heck, but this is where we need to work together. And we've done that. And we're putting in through the committee guardrails. That's comes number one, investor protection Resiliency, [clears throat] for sure, because at Nasdaq, we're the only one doing it on our listed market. So, we'll have two systems.
▶ 1:17:59We'll have overlap. We'll have incredible resiliency. In case something does go wrong, we want time to be able to fill in bugs, things like that. So, we'll have two systems. And they'll both be backed up. But, transparency the SIPs. So, the two SIPs, the securities information processors, will also be running. And those three things together, resiliency, the transparency the SIP, and institutional grade guardrails are really what makes it work. And it'll be better than we are today, because today we're open 16 hours from 4:00 a.m. to 8:00 p.m.
▶ 1:18:28It will be a better 23 than we have today in 16. So, we're looking forward to it. It's December 6th. And that's to me true innovation. Is Are concerns if trading volumes are low? As you expand trading hours, how do how do how should policy makers be thinking about that? I think, if I understand your question, meaning if they're too low to support what's going on. The incremental spend is not that we're already running these markets, like I said, 16 hours. It's about just the infrastructure. Yep. And that market is already growing. We're seeing it overseas.
▶ 1:18:56Any given day, it's it's the overall outside of the core hours is about 10 to 12% these last 2 months. And it's been 7 or 8. So, we're seeing it grow. If it even just stabilizes, I think we're still going to find other positive intended consequences where we'll get more traders and we, the US, will continue to lead the world. I I I totally totally agree there's a real opportunity here to modernize the plumbing, to look at the rules and regulations to make sure that we are modernizing. Come to you, Mr. Billings, if I can.
▶ 1:19:25Your testimony highlights that the number of operating equity exchanges is more than doubled. I think it was 8 to 17 since 2005, if my if my memory serves. I want to dive into some of the what the hurdles of maintaining real-time in 17 separate venues, and how does how does that added complexity play out? The plumbing seems to be there, but is there any added complexity by the by the number of exchanges?
▶ 1:19:53Well, certainly thank you, Congressman Stivers. It So, once again, Robinhood doesn't actually connect to exchanges. We We do it through our market makers, but the complexity is just additional connectivity, additional infrastructure. A different additional resiliency that needs to be built into into your infrastructure and how you're conducting your business. So, you know, those are things you need to consider in regards to that. And as we talked about earlier, you know, there's this so many exchanges that just aren't having the market share with that.
▶ 1:20:23And we aren't even, you know, it isn't just about if there was some exchanges go We actually are excited about the innovation we have seen on some exchange Uh you know, leading into what Mr. Kenny was speaking towards with going into 24 23 5, that was driven by an exchange that came on that that that challenged the SEC and said we want to go 24 23 24/7 actually. Yeah.
▶ 1:20:49And good for them to have pushed the exchanges into that 23 5 area. So, there's we're positive that there's going to be some innovation happening on the exchange space as well. Jump to you, Mr. McKenzie, if I can. Inside this innovation, what's how's this impacting counterparty risk? Well, I think um as a result of the I think Mr. Kennedy uses the phrase institutional grade safeguards. Um counterparty credit risk is really mitigated.
▶ 1:21:18These trades are cleared um and as a result we it's not a that's not a huge concern in the 24/7 environment. That's where you would want to see the movement of collateral over the weekend and that is an area where um a tokenization efforts could actually be quite helpful. Thank you very much. Thank you all for being here. Madam Chair, I yield back. Gentleman yields back. The Chair recognizes the gentleman from Florida, Mr.
▶ 1:21:41Heradopoulos, for 5 Thank you, Madam Chair, and I appreciate the good work our witnesses today and give us some insight. I guess as a fellow professor I'll ask this of our friend from Notre Dame. You've been studying this market obviously and teaching, looking at all different aspects. I think the law's been in place since 2005.
▶ 1:22:01I mean, just to the very broad question in your opinion as you study the markets, I think it's important to us and how do how do we modernize this system without making an unlevel playing field between the big boys and the smaller players? Thanks to firms like Citadel, Virtu, Jane Street, the little guys are taken care of. And the 605 reports that are being modernized are going to allow us academics, the reporters, and regulators to monitor.
▶ 1:22:30Somebody said earlier, "Gee, Robinhood may not be getting best execution because they take our payments." We'll be able to see. Right? So, little guys are taken care of, and you mean to tell me the big guys with their brokers, the broker I just don't I mean, I don't see why we need a nanny to impose rules when we've the big boys, the wholesalers, taking care of the retail, and we've got institutional traders like Joe there, that are going to make sure his clients are taken care of.
▶ 1:23:00So, let's reduce the complexity of Mr. Billings, would you agree with this Uh thank you, Congressman. Uh I would agree by and large with Dr. Battalio's statement. I I want to stress the importance of And as he mentioned, the enhanced 605, that is a powerful tool, and it transparency has always proven over the course of time by by SEC to really have a an outsized impact, whether it's 606
▶ 1:23:31or 605, and now we're enhancing that. And with that, Robinhood will be reporting 605 statistics as a broker-dealer. Now, we just consume it, we use it, we analyze it, and we direct our order flow according to that. But now, we'll be reporting 605. So, this is an amazing amount of data. It'll be It's more for academia, practitioners to analyze, so on and so forth, but we'll have an actually simpler form for that for the consumer to actually absorb. But we do want to be careful, as Dr.
▶ 1:23:59Battalio mentioned, Robinhood is different than the next firm versus the next firm versus the next firm. So, you want to be careful when people like draw conclusions versus execution quality because our customer is different than another incumbent firm out there. But we welcome the transparency. Thank you. And Mr. Slusarewicz, I'd like to ask you a question. I I was really intrigued by discussion recently with the Congressman from Massachusetts. If you could make one change within this system, you're dealing with it every day and from your unique perspective, what would be the one change you'd like to see made?
▶ 1:24:29Thank you, Congress. I would like to see the proprietary data feeds that the stock exchanges sell uh put through in an aggregated form rather than order by order. What happens is there's data that comes through and if you buy a proprietary data feed from an exchange and you collocate your server, by the way, just make sure you get that data quicker, you see things faster. You see more information. You see revisions, you see cancellations. You can model behavior more. Retail clients can't see that.
▶ 1:24:57So, they In my opinion, and I think a lot of other people, there's no need for all of that data to become to be uh sold by the exchanges. If you were to eliminate it, you wouldn't hurt the market. You would just get an aggregated feed and less information leakage. Because what happens now, and if anybody's traded recently, you know, if a stock is I'll just make a real quick example. If a stock is 5 cents bid offered at 10 cents and you close to 6 cent bid to try to improve it, someone's going to jump ahead of you. If you cancel it, they'll see you canceling. If you revise it, they see it.
▶ 1:25:26There's too much information out there in that sense. So, you can limit that and not hurt the markets. Would anybody disagree with that statement from the panel? I would argue Sure. that if you aggregate the data, you're going to have latencies and the quote feed becomes meaningless. It introduces bias look at bias. What I think is these direct feeds crucial for the price discovery that Mr. has argued exchanges deliver, which I agree with 100%.
▶ 1:25:54So, as you notice something's changing in the marketplace, you want to be first to take out the quote to move prices to new levels. So, I see Do I think there's too many prop feeds, 17, 18 that people have to subscribe to?
▶ 1:26:07Mhm. But, I think they they add value and I would I would certainly retail's Because retail sees a quote, they push a button and in 3 microseconds they see that they traded inside the quote. What could go wrong? Mhm. So, Mr. Billing, do you see that at Robinhood right now? Uh yes, well, in in the sense that we consume the SIP, and that's what we that's we there are there's a vendor display rule that we need to provide the SIP at the point of order entry, in which we do abide by that on our platform.
▶ 1:26:37So, it is fit for purpose when it comes to retail because of the ability if there's any sort of latency, it's not perceivable from a human aspect of it. Okay. Well, thank you, Madam Chair. I yield back. Thank you. Gentleman yields back. The Chair recognizes the gentleman from am I correct in this? Iowa? Mr. Nunn for 5 minutes. Thank you, gentleman from Montana for allowing Mr. Nunn, you are recognized.
▶ 1:27:07Always happy to speak on behalf of the Hawkeye State, Madam Chairwoman. Thank you so much. Appreciate you being here, and thank you very much for our our group being here today. I think this is an important hearing. I will say, back home in Iowa, though, every little bit of money that somebody has is being put into a retirement fund, a kid's savings account, a way to help take care of the farm. They're not thinking about Rule 611. They're not thinking about the national best bid or offer. And candidly, they shouldn't have to.
▶ 1:27:32Um when a they want to be able to do things by, you know, taking care of their families in the same way that a farmer wants an honest price at the co-op. And so, the good news is our markets have come a long ways in this. A teacher in Des Moines or a retiree in Adel can trade commission-free. Same as a Wall Street desk can. But, 21 years of patched-together rules have piled up, and I think that's what I'm hearing from this group right now. Just consider this.
▶ 1:27:58The number of US broker-dealers dropped by almost uh 30% between 2010 and 2024, even as industry assets grew by nearly $2 trillion. Now, I think anybody can look at that and say, that's consolidation, plain and simple, and I think it puts Main Street guys back in Adel, Iowa in a harder spot. So, Mr.
▶ 1:28:20Billings, you worked at Robinhood, and compliments for what you guys do there, but I want to talk to you a little bit about broker-dealers today who must wire into 17 different exchanges and buy market data from all 17 of them. If you got to be on this side of the dais and pull one of these rules out, what thing would you fix first to make this better for hometown America? Thank you, Congressman.
▶ 1:28:43And first of all, I love how you I love how you started because customers don't call up asking about rule 611. They call up asking about, "Hey, you know, there's there they just care about, you know, they see that they they see a quote, they see an execution within it. That's what they care about. So, we are aligned in that thinking.
▶ 1:29:02When it comes to the cost and the expense of rule 611, there is the smaller and medium-sized broker-dealers, hopefully they're using some sort of vendor to access that. And that vendor is absorbing some level of cost to it, so that is a cost that gets passed through to them.
▶ 1:29:20So, if there's any sort of change in 611, if there's any sort of reduction in the number of exchanges as a result of the removal of 611, then there will be a reduction of cost, you would hope, for those small and mid-size firms. And also, for the benefit of those firms, this is just going to push these exchanges innovate more, which gives them more opportunity to, you know, have exciting opportunities with their for their customers.
▶ 1:29:48I would agree, and I think that's the right positive market pressure we want to have for that. Uh Mr. Kennedy, I I know you do a lot of work there at Nasdaq. You know, I come from a sixth-generation family of farmers. My grandfather always used to say, "We don't tear down a fence until we know why it was put up. Otherwise, you might end up with a bull hanging out in your backyard." So, as we look at some of the things that are being changed, I'd like to talk to you about what the SEC is expected to propose.
▶ 1:30:11Changes to rule 611 that would take place imminently, and I believe the commission should consider delaying the compliance dates for rule 610 and 612. So, firms don't have to rebuild their system twice here. If the SEC scraps rule 611, what reform should be made so we can improve the market without knocking out the legs from under it? Thank you, Congressman.
▶ 1:30:34I appreciate your comments about your family because I started as an independent market maker on my own paying self-employment tax in Philadelphia, which is pretty darn high, and business privilege tax, and I get it. Um so, I I want everyone to be able to succeed. And I will tell you what To answer your question directly, 611 has to go down with 610 if it moves. It has to, and we've we've kind of talked a bit about that. I want to talk about the importance of rebates. I want to bring it back to one thing. You know, Mr.
▶ 1:31:03Saluzi had said, "Well, if the rebate it goes lower, then people can access And I'm going to bring it back to your question. Well, just to give you an example, one of those smaller equity exchanges that we have, BX Equities, we brought our rebate down to zero, and then we kept going, and going, and going. And our rebate is actually when you remove the access fee, the access fee pays you. So, instead of paying 30 cents per 100, which you see thrown around a lot, "Oh, it's 30 cents per 100. It should go lower." We pay 17 per And guess what?
▶ 1:31:33You can't get somebody on the quote because the other side of that is you have to charge. So, to your direct question of what else should the SEC do, we talked uh Congressman Vargas mentioned, you know, off the off-exchange trading. We want to compete in that off-exchange trading. Right now, Nasdaq really can't take that BX or PSX, the Philadelphia Stock Exchange, the oldest stock exchange in the country, where I am from, innovate and do something to compete with the off-exchange trading because there's different rules for off-exchange. We want to be able to segment.
▶ 1:32:02We want to be able to track Matt Billings flow at at Robinhood and say come to our off exchange venue and give us the same rules that some of our competitors have. So, that's what I would Thank you, Mr. Kennedy. And I would just like to submit a letter for the record from SIFMA that also calls for a pause in those dates as you highlighted. I yield my time back to the chairwoman. Thank you.
▶ 1:32:19So ordered. Gentleman yields back. And now the chair recognizes the gentleman from Montana, Mr. Dunning, for 5 minutes. Well, thank you, Madam Chair. We're in the home stretch, so thanks to the witnesses as well. I'm really glad we're having this hearing uh to get into the weeds as to why the United States has the greatest capital markets in the world and how we can make them more efficient. Um we talked a little bit earlier about zero commission securities. Many people, you know, take those for granted in the United States.
▶ 1:32:49And just a quick one for Mr. Billings, have there been any proposed reforms to our capital market system that would jeopardize zero commission trading? Thank you, Congressman. I would just be careful that if something came about that drove costs back to us, then we would drive costs back to the customer.
▶ 1:33:15I would want to be cautious if somebody went after payment for order flow. It's a known industry standard for many, many decades at this point in time. We handle it thoughtfully. We balance our payment for order flow. We have it equal across all of our execution partners. So, we mitigate any conflict of interest. So, that affords us to provide the services that we provide and all the customer support and everything such as that nature and next and and and how we conduct our business.
▶ 1:33:46So, we want to be cautious about anything that would touch payment for order flow in regards to
▶ 1:33:51Well, well, thank you for that. Uh move on real quick to rebates. Uh one of the most important aspects of market structure regulation is keeping US markets the world's most liquid, competitive, and technologically advanced. I'm going to move to Mr. Kennedy here.
▶ 1:34:05If US exchanges are restricted from offering competitive rebates or setting their own access fees due to rigid SEC caps while foreign markets still remain flexible, do we risk a slow migration of liquidity away from our markets to overseas jurisdictions? When I first hear that question, I think about it and and think that I could be clever and tell you no. It would be a fast erosion. The truth is, it would erode. I don't know the speed, but I know that the spreads would widen.
▶ 1:34:35That I can say with certainty. And that will we will no longer be sitting here saying the US markets are the envy of the world. We are today. We're attracting the largest IPOs. We are having global investors implore us to come and trade 23 hours, 24 hours a day. That that is the envy. And it's all built around not just liquidity, but it's other things that other congressmen have talked about today. It's about the trust in our markets.
▶ 1:35:02And I think any movement that's considered in isolation puts that trust at risk. Right. Thank you. It should come as no surprise that the technology underpinning our equity markets has advanced far beyond what it was when Regulation National Market System or Reg NMS was initially adopted in 2005. Accordingly, we need policies that match the speed of innovation. Um I'm going to go to Professor uh Battalio, Dr. Battalio.
▶ 1:35:31Uh what uh technological advancements have occurred in the decade since Reg NMS passed that warrant revamping revamping the rule to ensure that regulations are keeping pace with the markets? I guess the biggest technological I mean just the the speed with which the computers and the information processing it's made it such that executing venues in order to prove that they complied with Reg NMS have to take of their proprietary
▶ 1:36:01feeds because if regulators, and like the SEC back in the 2000s, use SIP data, it's going to look like there's just massive trade throughs. Right, right. Thank you. Uh move on for my last question, Mr. Kennedy. Are there specific equity market structures in Europe or Asia that the US should emulate to remain the global And conversely, is US overregulation currently dri- driving liquidity to overseas uh quote dark venues?
▶ 1:36:29I think our overregulation is not a factor just yet. In fact, as much as we all want deregulation, I think we have stay with the core principles that we've all talked about today, and Nasdaq especially. But I haven't seen where I need to replicate something that's being done in Asia or India, even Canada. I mean, I I serve on some Canadian boards, and the truth is, they're emulating us. They're they're Everyone's trying to copy us. Absolutely.
▶ 1:36:55Can I just jump in there as a native Montanan and graduate of Great Falls High School, 1999.
▶ 1:37:02I knew I liked you. Um I Optiver is headquartered in the in the Netherlands, in Amsterdam. I just wanted to add that European policy makers have routinely considered whether to implement a trade-through rule similar to 611, and this may be the single place where Europe is more efficient than the United States. They have always rejected a trade-through rule in Europe. So, that's one thing to consider. Right. Well, uh I've run out of time, so thank you again for your uh participation here. And that uh Madam Chair, I yield.
▶ 1:37:34Gentleman yields back, and I would like to thank uh all of our witnesses for their testimony today. And without objection, all members will have five legislative days to submit additional written questions for the witnesses to the chair. The questions will be forwarded to the witnesses for their response. Witnesses, please respond no later than June 24th, 2026. This hearing is now adjourned.