From Order to Execution: Ensuring Efficient and Transparent Equity Markets

intervention. As 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 tenets of Reg NMS, such as Rule six eleven, also known as the trade through rule, will allow us to properly assess the of market regulations and address any inefficiencies. Does a growing number of exchanges increase competition or just increase compliance costs? Are obstacles standing in the way of innovative new entrance into the market? Is rule six eleven securing the best outcome for investors? These questions all deserve careful consideration. In competitive and dynamic equity markets are directly tied to capital formation, and regulation should facilitate new offerings rather than throw sand into the market's gears. Earlier this year, for the first time, U. S. equity trading eclipsed one trillion dollars in volume in a single day, a remarkable testament to the strength and the liquidity of our markets. It shows exactly why com- companies from around the world choose U. S. exchanges for their public offerings. Maintaining high q liquidity and innovative technology is crucial to making our capital markets the best destination in the world from for everything from IPOs to secondary offerings. Twenty years in, it is time to consider how modernizing equity market structure requires updating REG NMS. And 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 price. I would like to thank our witnesses for their testimony today, and I look forward to our discussion. I now recognize the ranking member, Mister Sherman, um of the subcommittee uh for f- for four minutes for an opening statement.

The whole world chooses American markets. with an NMS regulation that should be, if anything, strengthened, but certainly not dismantled. And yet there are a few crypto billionaires who see an opening here. Having 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 computer. And yes, blockchain is one many of the many ways to use a computer and 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 say 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. NMS uh requires the trades be reported, that exchanges provide reasonable access to information, that exchanges uh use their best execution. And I might add, there's this discussion about zero commission? Well, Zero commission is uh is often or usually a a a together with payment for order flow. And 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. Uh, 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? Because 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, it's most frequent there. 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 account. 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 laws, uh and they should have in effect a stock exchange free of any ability to hold those uh engaged in insider trading accountable. Um 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. And it is not a um a great accomplishment to um uh fight politically uh to be eh 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. Insiders get the information every day. Yet we're told that ordinary investors should wait a hundred and eighty days. Uh, 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. We need information about what companies are worth. And we can't have our great system dismantled.

Today we welcome the testimony of Doctor Robert Battaglio. a Professor of Finance at the University of Notre Dame, Mister Mat Billings, the Vice President of Brokerage and President of Robinhood Financial and Robinhood Securities, Mister Kevin Kennedy, Executive Vice President and Head of North American Market Services at NASDAQ, Mister Mat McKenzie, the Head of US Policy and Regulatory Affairs at uh Optiver, uh here on behalf of p t g markets and then mr. joseph salucci partner and cofounder of of uh themis trading we thank each of you for taking the time to be here each of you will be recognized for five minutes to give your oral presentation uh of your testimony without objection your written statements will be made part of the record mr. Petaglio You are now recognized for five minutes for your remarks.

My name is Robert Battaglio. I'm a Professor of Finance in the Mendoza College of Business at Notre Dame, where I've been for thirty years. Over those thirty years, I've studied and written papers on many of the topics we'll discuss today. I'd like to start by thanking the subcommittee chair, Ian 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 thirty years. The nineteen seventy-five Security Act amendments democratized US equity markets by doing three things. It eliminated fixed commissions and it mandated the real-time reporting of trades and quotes. Uh, something called a SIP broadcasts 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 inter uh Schwab, Ameritrade, a bunch of those guys late nineties, Robinhood two fifteen, zero commissions now, so there's been I would say it's all kind of comes from the seventy-five security act amendments. Today, most retail orders receive price improvement and are executed within a few micro seconds. For point of reference it takes about three hundred and fifty micro seconds to blink your eye. The retail trading experience has never been better. Could things be improved? Of course. As was the case in two thousand eight, a careful analysis of the data data I believe would reveal that rule six eleven is not needed. Why? Because economic and or reputational incentives induce most market participants 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. I look forward to your questions.

Next we have Mister Billings. You are now recognized for five minutes for your remarks.

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 Mat Billings. I am President of Robert D. Financial and Robert D. Securities. I have over thirty years of experience in the financial services industry, specifically in trading, brokerage, and market structure. Robert D. 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. By pioneering zero commission trading and eliminating account minimums, Robinhood removed traditional barriers that kept generations of working class Americans on the sidelines. We approached this responsibility with a safety always mind-set,

Uh-huh.

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. We firmly believe that everyday investors to truly benefit from access to 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 execution. Robinhood believes that our market should provide opportunities for retail investors, foster competition, and lower transaction costs. Today's equity markets are working for retail investors. They have never had it better. 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 the original utility. Specifically regarding Rule six eleven, the trade-through rule, we believe it is time to consider a change. Adapted over twenty years ago, Rule six eleven was intended to protect investors, but has increasingly become a burden. It was it has introduced excessive operational costs, compounded market complexity, and spurred an unwarranted proliferation of stock exchanges. Robinson supports the decision of Rule six eleven. We believe that the modern equity market structure should be driven by competition. Free from artificial limitations of rule six eleven, markets can compete more effectively on cost, technology and services, product innovation, and execution quality in pursuit of retail order flow. Some have raised concern about execution quality if six eleven is rescinded. Those concerns are addressed by existing independent obligations. Broker-dealers owe a strict overarching duty of best execution to our customers. Final Rule of fifty-three ten, 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 conditions. These requirements exist regardless of the existence of the trade-through rule. We recognize, however, the market structure is highly complex and deeply interconnected. Removing six eleven could have significant impacts on other foundational components of REG NMS. Specifically, rule six ten, fees for access to quotations, and rule six twelve, minimum pricing increments. Rule six ten, six eleven, and six twelve were introduced together in two thousand five, when the SEC adopted REG NMS. Because these rules are inextricably linked, removing the trade-through prohibitions of rule six eleven will undoubtedly affect excess 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. At Robinhood, we will continue to leverage advancements in technology to drive down cost 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 comprehensive, data-driven, and focused on the interests of everyday investors and market integrity. I thank the subcommittee for holding this important hearing. I 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 five 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. My 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 nineteen eighty-seven 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. I joined Nasdaq nineteen years ago, and I appreciate the opportunity to offer this subcommittee, 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 a regulatory framework that has evolved over time, supported innovation, and balanced competition with investor and issuer protection. As the subcommittee considers market structure, I want to emphasize four points. First, displayed and transparent markets. Displayed and transparent markets remain essential to investor confidence and price discovery. Second, reforms should be considered as a system because changes in one area can create unintended consequences in another. Third, policy should support innovation and competition without without undermining transparency, liquidity or, most importantly, investor protection. And fourth, Modernization should be data-driven and focused on better outcomes for investors and public companies. At the center of our equities market structure is the national best bid and offer. You'll hear it referred today as the MBBO, which remains the benchmark for assessing value and execution quality. Displayed quotes on lit exchanges form that benchmark. Off-exchange venues serve valid purposes, but they depend on public prices created in the displayed markets. If policy weakens incentives to display liquidity, it weakens price discovery, and 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 platforms. Some fragmentation reflects competition, but reforms should recognize that market structure rules 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 together. As the SEC reviews rule six eleven of regulation NMS, it is appropriate to ask whether it still works as it was intended to work. But, 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 innovation without creating unnecessary risks for investors or market integrity. Regulatory sandboxes may be useful, but they should be transparent, they should be temporary with a with an exit ramp, and they need to be paired with standard rulemaking if they do become permanent. US markets are highly competitive, but exchanges operate under a more constrained regulatory framework than many off-exchange venues. If policymakers want competition based on quality and transparency, Exchanges need 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. That means looking at the best execution, looking at spreads, depth of liquidity, reliability, and transparency. Clear rules and transparent data are critical to accountability and investor confidence. US equity markets finance growth, they support retirement savings, and they attract global capital as well. Modernization is necessary, but it needs to be measured, evidence-based, and designed to improve outcomes for investors and for public companies. 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 questions.

I uh thank you, Mr. Kennedy. And now, Mr. McKenzie, you're recognized for five minutes for your oral testimony.

Thank 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 member. I'm appearing on behalf of PTG Markets. PTG represents firms that commit their own capital and provide liquidity across global markets. We're here today to discuss REG NMS and specifically rule six eleven. These rules were adopted in two thousand and five, and over the last decade, PTG has consistently urged careful re-examination of REG NMS and rule six eleven, in particular. The SEC has already begun that process. In 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 six eleven 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. Reg NMS was designed for a specific policy problem, how to protect displayed quotations and promote competition among trading centers in an increasingly electronic market. The thinking behind rule six eleven is appealing. If one exchange is displaying a better price, why should an order execute at a worse price somewhere else? That question was of particular relevance twenty years ago, but the policy implications following from the SCC's answer have become more difficult to justify in the fragmented market that REG NMS produced. In two thousand twenty six, 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. And for larger orders, mechanically routing to every protected top of book quotation, 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 trades' execution. This distinction is especially important because broker dealers already operate under best execution obligations. FINRA rule fifty-three ten 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 six eleven would not leave investors in a vacuum reassessing rule six eleven 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 work-arounds that were never the end goal of the rule. In light of these circumstances, we have five recommendations for modernizing the Reg NMS ecosystem. First, the SEC should consider revising or replacing rule six eleven with an outcomes-based best execution framework. Second, recently modernized rule six O five 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. Fourth, exchange fees should continue to receive rigorous SEC scrutiny. And fifth, Reg NMS rules that are interconnected with rule six eleven, such as rules six ten and six twelve, should be reviewed and revised in concert with it. The goal of modernizing Reg NMS is straightforward. Venues should compete to provide real liquidity and better executions and regulatory incentives should reward the best outcomes for investors. 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. Slutzy, you are now recognized for five minutes for your oral testimony.

Thank 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 Themish Trading. Uh, for over twenty years we have operated as a no-conflict institutional agency broker. We do not make markets, we do not trade prioritarily, 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. Our 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. These 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, on his recent assessments concerning Reg NMS. Last 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 transparency." Reg NMS contains many flaws. There's no question about it. But the fact is, r- removing rule six eleven is not the way to do it. Reg NMS, we must be very careful about how we fix it. 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 p- have rebates with their clients. We urge this committee and the SEC to reject any push to eliminate rule six eleven, simply to clear a path for an innovation exemption involving tokenization. Allowing trading of tokens without the explicit consent of the underlying public companies, and without conferring voting rights or dividends, is dangerous. It 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 six ten, which is not as exciting. The stock exchange, Mimex, recently requested exemptive relief to delay the implementation of lower access fees. They claim that the industry needs more time to see what happens with rule six eleven. We strongly disagree. The industry already debated this issue. The SEC approved the access free 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 November. Next, let's talk about the consolidated audit trail. Born after two thousand and ten, the two thousand and ten 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. But despite its flawed implementation, the cat is finally fully operational and has proven to be a vital regulatory tool. 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. After all, the point of the tool is to potentially identify cons- uh 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. The 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 twenty ten. Rather than eliminating the trade through rule, delaying access fee reductions and continuing to weaken the cap, 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. Thank you and I look forward to your questions.

Thank you, Mr. Slutzy. We'll now turn to member questions, and I recognize myself Since commission of free trading became the industry standard for retail investors in twenty nineteen, we've seen this significant jump in the number of Americans participating in our capital markets. Main street investors directly benefit from markets that work with their interests in mind. Mister Billings, can you touch on the importance of tailoring equity market regulations to ensure that more Americans can build long-term wealth through investing.

Thank you, Chairman Wagner. Uh, you are correct. I think there was a recent Gallup poll that said sixty-two percent of Americans are invested in the marketplace uh 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 democratization is access and investor protection. And that access is through intuitive, simple platforms that demystify investing, allows them to engage in the marketplace, there is access to twenty-four 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 is a time that uh flexible in investing they have that opportunity with that and another big pillar is notional investing notional 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 nature 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 the marketplace, and it's not intimidating to them, and they 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. Mister Kennedy, can you explain why equity market structure is so intrinsically tied to capital formation?

Thank you for the question, Chairman Wagner. I think it all stems from the foundation of capital formation, which was in your question. And if you think about capital formation, We wanna lower the cost of capital for companies that need to grow and develop and innovate. And to do that, you need a really strong secondary market. One that is super liquid, tracks 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. And that's what will bring the public markets back and continue to stay with the United States.

And 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 a, 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, you need to have the right structure because if you change the wrong thing in reg NMS because you wanna cater to one asset class or one institutional base, you risk ruining ruining what we know, we've all we'll say it forty times today, we are the envy of the world, we have the best markets in the world. And if you're not careful, the growth that we have seen in the last three years with this new SEC administration, we're up fourteen point four percent in options and twenty percent a year over the last three years. We're seeing equity options volume go through the roof. We're seeing our equity, our equity volume is twenty billion shares a day now almost in in twenty twenty six. It was twelve point two three years ago. So doing those right things will continue to attract capital. You

Market structure is admittedly a complicated and niche area of financial regulation. However, the rules in REG and MS filter all the way from the exchanges on Wall Street down to individual investors trading on their phones. That's why getting the right the right rules of the road in place are so very important. Mister 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. I 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, Mister Sherman, for five minutes for questioning.

We've got the deepest and best capital markets in the world drug dealers would like to invest. that various actors would like to invest. And they're also the best markets uh for those who want to engage in insider trading. Uh, Mister Sal Z Saluzzi, um, if we go with this uh granting of exemptive relief for tokenized securities, would that allow those who uh acquired their capital through, say, drug dealing to invest? And 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. And I go with the principle of do no harm first. And if you are gonna 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 are where are 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 this. We have yet to see the proposal, and we're 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. It could be one, ten, five hundred 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 in a side room. So let's be very careful on how that goes about.

Yes.

And 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 advisors, 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 a capitalist system but rather in executive management. Uh, Mister Kennedy, 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 uh investors in the capital markets? Does 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. I do wanna state that working with this SEC has been, dare I say it, almost a master class in transparency and collaboration. But that said, I I wanna 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. Institutional grade guardrails, and you're seeing us working with the industry, building them for always-on trading. Working and engaging with corporate issuers is exceptionally important to NASDAQ. As is transparency and the securities information processor. So, I 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 there.

Thank you. Uh, Mister uh, 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 exempted, uh, from uh core securities regulations where the rest of the market of course is subject to those uh requirements.

Tokenization could i- 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 uh 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 w- this actually goes on now, there 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 wanna 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 really not be good for investors.

Gentlemen's time has expired. The chair now recognizes the chairman of the full Financial Services Committee, Mister Hill of Arkansas, for five minutes.

Thank you, Chair Wagner, and thanks for our panel for helping us sort through this, uh, issue of how technology is so rapidly changing our markets. Uh, we've been talking, obviously you've had a lot of conversations about Sherman Atkins' issue of calling the order protection rule a misnomer, that it actually encourages market fragmentation. That's his assertion. If the commission were to rescind six eleven, 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? Mat, you wanna tackle that? And then, Mister Kennedy, maybe.

Uh, thank you, Chairman Hill. Uh, so the with fifty-three ten The answer is, it's, yes, it can. I, and we like the fact that it's a principles-based regulation, and it's protecting our customers in the way, well, we ha- we have an approach with best execution at Robinhood, and it's a very robust and process-driven approach. And it exists today, and it'll exist tomorrow with or without rule six eleven. And we, and if six eleven 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. So, we are confident that investor protection will continue to be at the will continue to be very, very strong.

Mm-hmm.

if FINRA were to reinforce it, that's absolutely fine. During the course of the, over the, I mean, FINRA will has, FINRA will has to the test of time and during the course over the years, they have sent out rec notices every once in a while just to kinda reinforce a particular point or something like that. So we would suspect that would not be unlikely that there would be an ask to FINRA to kinda reinforce fifty-three ten. We'd welcome that. We're happy to uh oblige by whatever direction they take this in, but we're confident that fifty-three ten will come.

Right. Right. Mr. Kennedy? Mr. Kennedy, you wanna opine on that?

Thank you, Chairman Hill. I wanna make sure I answer your question correctly, but it's really about the repeal of six eleven, six ten,

Yeah.

and the m- and what's gonna happen in the markets. And when we first got wind that that six eleven would be considered to be removed, we were sort of agnostic. However, where we're not agnostic is that the reason that six ten exists is because of six eleven. And 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 respect was that this SEC under Chairman Atkins wanted to be transparent, wants to move the markets, wants to modernize, and we as operators, it's the largest pool of liquidity and equities, we need to work with our regulator. So we are open, and we've said this on various panels and we've told the chairman and we've told, uh, Jamie Selway, We're open to the modernization of it. What we'd like to see is then remove the excess fee cap so we can compete with the rebates because the excess fee cap drives the rebates. And we've talked ad nauseum about the value of rebates. They're transparent. They tighten the markets. We see it quarter after quarter, the market's getting tighter,

Mm-hmm.

and they attract capital. So, we want to advance markets, we want to modernize, and we want to do it with the commission.

Mr. McKenzie, um, sort of on the same theme of best execution, depends on a Kind of a nineteen seventies set up technologically and since I started my career in the securities business in nineteen seventy three typing confirmations with carbon paper I know a little bit about the nineteen seventies conversion fifty years later. But how do industry participants be legally required to purchase you know the public uh SIP data and claim to prioritize Beck's execution when you're dependent on that system we do need to modernize don't we?

Thank you for the question. Um, first off, you know, the PTG as reflected in the testimony does believe that the multifactorial analysis in the FINRA rule fifty three ten 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.

Mm. Mm-hmm.

Um, and we do feel that in the absence of rule six eleven, that standard would be pretty positive. On 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 six O five modernizing that data. That is helpful and in the new system if rule six eleven is repealed, we would expect uh six O five data to be helpful as well.

Thank you so much. Madam Chair, I yield back. Thank you for this hearing.

I'm and yields back. The chair now recognizes the gentleman from Illinois, Mister Kasten, for five minutes.

Thank you Madam Chair. Uh, thanks all of you for coming. So, i 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 participate, disclosure requirements, I guess are a subset of those rules, but you know with certain disclosures you could be exempted from certain rules, and and then of course robust enforcement of all of those. Um, I I have concerns that You know, the Chair Atkins is talking about repealing or or at least weakening the order protection rule and I guess Mister Saluzzi I I guess I just just very briefly from you, let's assume they were to eliminate it. Do you think we can still provide robust investor protections with some enhanced level of disclosure um you know and or enforcement or i- i- is is any elimination of that rule just gonna lead to less protected investors?

Uh, thank you for the question. I, 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 six eleven protects. The NBBO is how people price off exchange uh trades. So 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 m- p- measure your performance against the NBBO. If you start to weaken that, you will weaken confidence, you will weaken trust.

The 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 I'm particularly concerned with the zero commission brokerages because of those conflict of interests within the brokerage house. Mister Billings, when your CEO was here back in twenty twenty one, he testified at the time that a hundred percent of your market makers had had payment for order flow contr 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 P five. Is is it still the case that a hundred percent of your book is is under Pfaff contracts? The market makers you deal with?

I'm I'm not sure what you're saying from a Pfaff contract perspective. Are you saying do we do we accept P payment for or for the funds?

At a hundred percent of your market makers. So you're you're paying zero, all of your customers are paying zero commission. And then a hundred percent of your market makers, at the time I think he said there were six market makers that represented a hundred percent of the other end of your trades.

Yeah, Robinhood does receive payment for,

And those are

well first of all, thank you for your question, Congressman. Uh, Robinhood does receive payment for order flow and it is equal

And it

in its uniform across all of our execution destinations.

Y- y- yeah, and he'd, and he, and Mister Tenev had testified as much before, but that then raises the question of y- you may be the most ethical person in the world, but y- 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'

Well I I I assure you,

Right?

Congressman, that best execution obligations are our primary focus with this.

I'm I'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 regulators for violating best execution. Um, so it's a little hard to say just trust us this time around.

Yeah.

You 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. Um The, Jerry Atkins has also indicated that he wants to provide an exemption from REG NMS for tokenized securities. Um, we've seen significant price differentials between real equities and tokenized derivatives of those equities in recent times. Um, Robinhood um was scrutinized last year for offering tokens in OpenAI and SpaceX. That was done without those companies' approval. Mister 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. Is it still your position that tokenized securities don't fit within the existing frameworks?

So within the, with domestically, Congressman, it's our position that we're waiting in seeing what's gonna happen with the innovation exemption that is eminent with with this.

But, 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, the existing regular structures?

Well, I mean, I, the SEC has made it clear that a tokenized, uh, the security, I mean, it's 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 their future state but we will wait for the innovation exemption to see how that turns out.

Well

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

Well, so so just just to be clear, I agree with the SCC that a tokenized security is still a security. I would note that the Clarity Act that passed out this committee said it's not. that suddenly it magically becomes a commodity. And if indeed we pass that law, we're gonna have a huge problem. Mister Kennedy, do you think the tokenized security should be regulated differently by different regulators, depending on what platform they're offered on?

Tokenized 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 Security and Exchange Commission. So that's our approach.

Gentlemen, the time's expired,

Let's keep it that way.

I I ask that you respond in in writing any any further.

You're back.

And uh the chair now recognizes the chair of our task force on monetary policy, Mister Lucas of Oklahoma, for five minutes.

Madam Chair, before I begin my questioning, could I submit for the record that an analyst can send a letter from the Security Traders Association? Thank you, Madam Chair.

Affordered.

And thank you to our witnesses for being here today. Uh, Doctor Patola Let's pull back up to the thirty thousand foot level and start with an overview of where we are now. Twenty-one years after the SEC initially adopted regulation NMS, our equity markets are deeper, more liquid, and serve investors better than ever before. What aspects of our equity market structure need to be preserved at the, as the SEC contemplates improvements to regulation in SM? You, Doc. Sorry.

Sorry about that. So, back, so I was around with the original discussions back in the two thousands. 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. The one rule that I found, uh, 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 rules the way that happens. I believe there's problems with the way the data rule allocates. It could be worked on. The 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 I'm willing to trade, you want them to get rewarded for that. So you don't wanna let somebody come in like on prices right, and better their quote by point zero zero zero one. sense. So those are those are the two things I think have some value.

Turning to you, Mister Kennedy, rule six eleven is linked uh with many other reg NMS rules. From your perspective, what spillover effects should the SEC be mindful of as it considers the changes to six eleven?

Thank you, Congressman. I 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. And that is clearly the the most, I'd say, in the flood plain of any change there. So, as long as six ten, 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 unpleasant.

Mister McKenzie, what is your viewpoint on the same question? What rules may need revisiting should the SEC propose rule changes to six eleven?

So, uh, 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 six ten and rule six twelve uh would need to be modernized at the same time that a six eleven proposal were to move forward. Um, because in the event that uh, changes are made in a piecemeal approach, you could see dislocations as a result of the interconnected nature of these things. And the Lockton Cross market prohibition in six twelve is a strong candidate for that, given the the modernization of the markets as they exist today.

Mister Billings, as the industry transitions to faster settlement cycles, we know it significantly reduces counterparty, credit risk, and default contagions. However, there are operational risk. How 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 how we can speed up settlement cycles. And Robinhood is advocating for a Tzero regime. But, let's slow down a little bit. When we went from T plus two to T plus one, that was over a year's effort to organize and coordinate this effort. And we went to T plus one in Memorial Day of, Memorial Day weekend of twenty twenty four. 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. And it took such amount of effort to get to that point. that if we take that next step for industry-wide global sediment, 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 gonna take a tremendous effort to be able to shorten the sediment cycle further.

Thank you. And with that, Madam Chair, I yield back the balance of my time.

Gentleman yields back. The Chair now recognizes briefly the ranking member, Mr. Sherman.

Asking Madam as consent to put into the record a statement for by uh Tyler Gelash, uh of the uh Healthy Markets Association, designed for this hearing.

So, okay. Chair now recognizes the ranking member of our task force on monetary policy, Mister Vargas of California for five minutes.

Thank you very much Madam Chair, and thank you ranking member, and of course thanking all the witnesses, one of the problems when you go sort of last here is that all the good questions have been asked and uh but also one of the benefits is that you did get to hear the testimony so one of the things that kinda sprung out to me is that when uh reg NMS was created back in two thousand five to make sure that the market worked fairly well and was fair and the people had confidence in it that the core architecture basically worked that basically it created a better system and 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 gonna 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, uh, Mister Kennedy, 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 wanna generally quote you i don't wanna misquote you but i generally the 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 so 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, because 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? Mr. Kennedy?

A very sincere and to the point question, and I I love it because We are seeing it, right? We, I mean, if 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, liquidity, because nothing, if you, if you don't have liquidity, you have nothing, you have no price 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 in nineteen eighty seven 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. We need to work from that out, not from the outward back in.

That makes sense. However, you it's interesting, one of the uh your written testimony, you say something I found very interesting, your your second point. 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. And then you go on to say other things. It does seem then that, OK, 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 and in fact with always-on trading that we're building out to begin on December sixteenth we are actually bringing that globally and today we're open sixteen hours we're gonna be open twenty three hours with those same rules so it's 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. And you'll see days where we're sixty, sixty-five percent because everybody needed liquidity. And that's a great demonstration of what may happen

Mm.

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 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 five minutes

uh thank you chairman uh doctor batalho warren davidson from uh mba class of uh two thousand five so plus uh twenty years i remember you fondly and uh it was a good class uh there's a lot gone on in capital markets back then 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. We'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's done maybe more, uh, to attract retail investors than just about anybody. And we down is, uh, 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, I don't know that I like that or if it's a real improvement. Um, but if you look at the w- the ability of a blockchain, you know that you can't have, uh, you know, anything but put called parity if you do that. You can't have pledges hypothecated on shares. Uh, so it solves a lot of problems. So, when we look at um, you know, the topic for today, rule six eleven, Professor, what should we be paying attention to?

I think we should step back and think about do retail the r- the market for retail order flow has never been more competitive than it is. Right? The wholesalers, so if you if you look at this rule six O five 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 six hundred and fifty percent of what's actually reported. To 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. What 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 re reported before the trade itself. And that's being published as the NBBO used to benchmark everything. So indeed, people who have to die uh 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, Mister McKenzie, uh, you know, when you think about six eleven, you think about, you know, just to, well, listen to the professor's response there, you look at, um, There's a whole exchange that basically runs by limiting trade speed. You 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 latency. 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. Uh the the aspect of that particular exchange and what they're bringing to the market, is a sign of competition. It's an innovation. And the position of PTG is that a repeal uh or rescission of six eleven would force exchange competition. So it would it would hopefully reduce the seventeen exchanges that exist now, capture a fair amount of revenue, including the very low trading revenue exchanges, capture thirty-one 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, Robin Hood, you guys are there with customers every day. Uh, we'd love to get rid of the accredited investor rule. It's not yet unanimous, so I can only speak for myself. Um, there are some colleagues that would like to. 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 gamed 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 the private markets, when you mentioned accredited investor role?

Well, I'd like to get rid of it across the board, but I know you're trading public markets Unless you've got another pool that I don't know about.

Yeah. No, uh, thank you. You know, uh, you know, the the focus here is just having surveillance systems that you need that, you know, are 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 on our real time.

Oh, and the time's expired.

Thanks.

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, Mister Lynch of Massachusetts for five minutes.

Thank you, Madam Chair. Uh, Mister Saluzzi, you write in your testimony that uh we hope the SCC is not considering the elimination of rule six eleven because it potentially stands in the way of their quote innovation exemption and tokenization plans. I think that's exactly what's going on here. Uh, you 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. Uh, you wa- 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, a as as Mr. Davidson said, we've got robust markets, we've got a great reputation for integrity, I think it's because acro around the world people see these markets as as fair, fair and orderly. What does the elimination of of six eleven do to all that, if if you can if if you can game the system, if if if you're not giving someone the NBBO I mean would wouldn't that undermine your faith in the markets itself? I mean, it it it would to me. And and it's always been a, you know, a a ground truth, uh, in the markets that you get the best, you get the best price. And did you talk about this and and about the potential undermining of investor confidence that might result if we get rid of six eleven? 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 market.

Thank you Congressman, and 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 Mister Billings said, that it that overrides everything, fifty three ten FINRA ruled, 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 six eleven if you may, because right now we have seventeen stock exchanges. n- ten of them have one percent market share or less. And these are all protected quotes. So 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 two percent 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 where there's an exchange out there, it's called, uh, now it's a New York Stock Exchange, Texas. but it used to be called the New York Stock Exchange Chicago. It has a half of one percent market share in twenty twenty four is when they had the numbers on it and they collected twelve percent of the quote trading revenue, which was about eighteen million dollars. 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 six eleven. Do those three things and you've made it much better and you don't need to eliminate six eleven. There's no need to.

Right. You also talk about uh access fees and rebates, which are at the heart of uh almost every decision that an auto-routing algorithm makes uh could you talk about the reasons of lower lowering what how that might help

Sure.

uh the situation if we lower those access fees I guess it reduces the incentives.

Sure. Yeah, the the way the stock exchanges are set up now everybody it's a make or take or model, so when you post liquidity you get a rebate, when you take liquidity from an exchange you get, you pay an access fee. Access fees are around thirty mils cap right now. Rebates tend to be up around twenty-seven, twenty-eight 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, as which what the SEC already approved and the courts upheld, to ten ax to ten mils, and the exchanges will lower the rebates probably down to around seven or eight. Exchanges 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, and I don't understand that the exemptor relief request is getting so much action right now for the MMEX request. So if it was up to me I'd say no, they, they go through uh ten mills, which has been approved, and let's, and it's not, by the way, it's really not difficult to do. Exchange is put through exchange fee uh changes dozens a year, so it's not a very difficult process. Thank you. Um, thank you Madam Chair. I'll yield back the balance of my time. Thank you.

Gentleman yields back. The chair recognizes a gentlewoman from in uh gentleman, pardon me, from Indiana, Mister Stutzman uh for five minutes.

Thank you Madam Chair. Uh first of all I'd like to submit uh a letter for the record from the American Securities Association.

So ordered.

Thank you gentlemen for being here. Uh over the last twenty-one years, Hoosiers have greatly benefited from the highly competitive equity markets underpinned by REG NMS. Market innovation has allowed for efficient price discovery, reliable investor access, accurate quote handling, and orderly clearing and settlement. The number of Americans in our equity markets is near an all-time high, and Americans are accessing these markets earlier in their lives, including my twenty-four and twenty-year-old sons. That said, just because the system is working well doesn't mean there aren't improvements to be made. I'd like to begin by discussing the SEC's trade-through rule. Chairman Atkins voted against it as an SEC commissioner in two thousand five and has made reforming or eliminating it a priority as chairman. Uh, Mister 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, and what sorts of benefits would investors in my state see?

Right. Thank you for your question, Congressman. So, the focus here is a- always on investor protection. And with the elimination of six eleven, and keep in mind, when we eliminate six eleven we do wanna have a comprehensive review of all NMS rules, including six ten and six twelve. So if we're doing this, we wanna be cautious about a a a strict elimination because removing six eleven without thinking about six ten will have impacts on the market and maybe market integrity with that. But in removing six eleven, and Mister Saluzzi raised some good points there, there are over ten exchanges out there that have less than one percent market share. OK. So if we were to remove that, and if there was a gonna be some consolidation or something that went and there were fewer exchanges that existed today 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 uh Market Manager's 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? We 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.

Alright, thank you. Um, Mister McKenzie, I'd like to follow up to that. Those opposed to rescinding 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? And let's say the SEC rescinds rule six eleven.

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 fifty three ten, 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. And so, understood in that context, in the absence of six eleven, federal rule fifty three ten acts as a real comprehensive backstop to provide for best execution. And, you know, to to build on um, mister Billing's 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 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 so a reduction in the number of exchanges that could result from the repeal of six eleven 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 tandem?

Yes, so um rule six ten is has been discussed, rule six twelve 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.

Alright, very good, alright thank you Madam Chair, I'll yield back the balance of my time.

Gentleman yields back. The chair recognizes the chair of our subcommittee on digital assets, uh, Mister Stile of Wisconsin, for five minutes.

Thank you very much, chair. Thank you for holding today's hearing. Uh, let me follow up on where Representative Stutzman uh just was. Come to you, Mr. Kennedy, um, if I can. In your testimony you discussed uh the importance of responsible innovation and guiding transformation and growth in our capital markets. But I want to dig into the twenty four seven three sixty five Um, and what is the architecture that's really needed? Um, what is needed to be overhauled, uh, and in particular from a risk management perspective, um, in many ways from a technical standpoint you can trade three sixty-five, but what is, what is the, um, the operational resilience, what is the risk, and in particular you noted, uh, I believe that you said that there might be like an overnight technical, uh, pause might be helpful when trading volumes are low. Could you flush that out a little bit for us?

Sure. Thank you, Congressman Stile. Working with the industry on resiliency is core. I mean, we're, 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, uh, guardrails, that's comes number one, investor protection guardrails. Resiliency, for sure, because at NASDAQ, we're the only one doing it on our listed market, so We'll have two systems, we'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 of the SIP. So the two SIPs, the security disinformation processors, will also be running. And those three things together, resiliency, the transparency of 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 sixteen hours from four AM to eight PM. it will be a better twenty-three than we have today in sixteen. So we're looking forward to it. It's December sixth, and that's to me true innovation.

I- is there concerns if trading volumes are low? I- as you expand trading hours, how do how do how should policymakers be thinking about that?

I I think if I understand your question, meaning if they're too low to support what's going on. Now, the incremental spend is not that,

Right.

you know, we're already running these markets, like I said, sixteen hours. It's about just the infrastructure.

Yep.

And that market is already growing. We're seeing it overseas. Any given day it's it's the overall outside of the core hours is about ten to twelve percent these last two months. And it's been seven or eight. So we're seeing it grow. If it even just stabilizes, I think we're still gonna find other positive intended consequences where we'll get more traders. And we, the US, will continue to lead the world.

I I I total totally agree there's a real opportunity here to modernize uh the plumbings look at the rules and regulations to make sure uh that we are modernizing. Come to you, Mr. Billings, if I can. Um, your testimony highlights that the number of operating equity exchanges is more than double, I think it was eight to seventeen uh since two thousand five, if my if my memory serves. Um, wanna dive into some of the what the hurdles of maintaining real-time connectivity uh in seventeen separate venues and how does how does that added complexity play out? Um, you know, it the the plumbing seems to be there, but is there any added complexity by the by the number of exchanges?

Well certainly, uh thank you Congressman Stile. It, so once again, Robinhood doesn't actually connect to to exchanges we do we do with our market makers, but the complexity is just additional connectivity to additional infrastructure,

Yep.

a diffi- additional resiliency that needs to be built into um into your infrastructure and how you're conducting your business. Uh, so, you know, those are things you need to consider, uh, 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. And when we aren't even, you know, it isn't just about if there is some exchanges go away. We actually are excited about the innovation we have seen on some exchange fronts. Uh, you know, leading into what Mister Kenny was speaking towards, with going into twenty four, twenty three five. That was driven by an exchange that came on, that, that, that challenged the SEC and said we wanna go twenty four twenty three s- twenty four seven actually.

Yeah.

And good for them to have pushed the exchanges into that twenty three five area. So there's we're positive that there's gonna be some innovation happening on the exchange space as well.

Jump to you, mister 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 mister Kennedy uses the phrase institutional grade safeguards. Um the counterparty credit risk is really mitigated. These trades are cleared. Um, and as a result, we it's not a that's not a huge concern. In the twenty four seven environment, that's where you would wanna see the movement of collateral over the weekend, and that is an area where um uh tokenization efforts could actually be quite helpful.

Thank you very much. Thank you all for being here. Madam Chair, yield back.

Gentleman yields back. The chair recognizes the gentleman from Florida, Mister Herodopolis, for five minutes.

Thank you, Madam Chair. And I appreciate the good work uh by our witnesses today and and give us some insight. Uh I guess as a fellow professor I'll ask this of our friend from Notre Dame. Uh you've been studying this market obviously, uh teaching, looking at all different aspects since, I think the law's been in place since two thousand five. I mean just to the very broad question in your opinion as you study the markets, uh I think it's important to understand how do how do we modernize this system without le uh making an unlevel playing field between the big boys and the smaller players?

W- why? Thanks to firms like Citadel, Virtu, Jane Street, the little guys are taken care of. And the six O five reports that are being modernized are gonna allow us, academics, the reporters, and regulators to monitor. Somebody said earlier, gee, Robinhood may not be getting best execution because they take higher payments. We'll be able to see. Right? So, little guys are taken care of, and you mean to tell me the big guys aren't? with their brokers, their broker algorithms. I just don't, I mean, I don't see why we need a nanny to impose rules when we've got the big boys, the wholesalers, taking care of the retail and we've got institutional traders like Joe there that are gonna make sure his clients are taken care of. So, let's reduce the complexity in markets.

Mister Billings, would you agree with his assessment?

Uh, thank you Congressman. Um, I would agree by and large with Doctor Petalio's statement, I, I wanna stress the importance of transparency. And as he mentioned, the enhanced six O five, that is a powerful tool and it, transparency is always proven over the course of time by, by the FCC, to really have a, an outsized impact, whether it's six O six, or six O five, and now we're enhancing that. And with that, Robinhood will be reporting six O five 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 six O five. So this is an amazing amount of data. It'll be, it's more for uh academia practitioners to analyze, so on and so forth, but we'll have a actually simpler form for that, for the consumer to actually absorb. But we do wanna be careful, as Doctor Battaglia mentioned, Robinhood is different than the next firm versus the next firm, this is next firm. So you wanna 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 Mister Salusi, I'd like to ask you a question. I I was really intrigued by your uh discussion recently with the Congressman from Massachusetts. If you could make one change within this system, you're dealing with it every day and uh from your unique perspective, what would be the one change you'd like to see made?

Thank you, Congressman. 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 co-locate your server by the way, to 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. So they, in my opinion, and I think a lot of other people, there's no need for all of that data to be come, to be sold. by the exchanges if you would have eliminated 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 well recently you know if a stock is I'll just make a real quick example if a stock is five cents bid ten offered at ten cents and you post a six cent bid to try to improve it someone's gonna jump ahead of you if you cancel it they'll see you cancelling it if you revise it they see it there'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 gonna have latencies and the quote feed becomes meaningless. It introduces bias, look-at-bias. What I think is these direct feeds are crucial for the price discovery that Mister Kennedy has argued exchanges deliver, which I agree with a hundred percent. So as you notice something's changing in the marketplace, you wanna be first to take out the quote,

Mm-hmm.

But I think they cert- they add value and I would, I would certainly, retail's fine. Because retail sees a quote, they push a button, and in three microseconds they see that they traded inside the quote. What could go wrong?

Mm-hmm.

So.

Mr. Billings, you see that at 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 so 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.

OK well thank you Madam Chair I yield back thank you.

Gentleman yields back, the chair recognizes gentleman from Am I correct in this, Iowa? Mister Nunn, for five minutes. Thank you, gentlemen from Montana, for allowing that. Mister Nunn, you are recognized.

Always 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, uh, every little bit of money that somebody has is being put into a retirement fund, a kids' savings account, a way to help take care of the farm. They're not thinking about Rule six eleven. They're not thinking about the national best bid or offer. And candidly, they shouldn't have to. Um, you know, they wanna 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 twenty-one 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, the number of US broker dealers dropped by almost uh thirty percent between twenty ten and twenty twenty four even as industry assets grew by nearly two trillion dollars. 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. Billings, You worked at Robinhood, compliments for what you guys do there, but I wanna talk to you a little bit about broker-dealers today who must wire into seventeen different exchanges and buy market data from all seventeen 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. And first of all, I love how you h- I love how you started because customers don't call up asking about rule six eleven. They call up asking about, hey, you know, there's, they're, they just care about, you know, they see the, they, they see a quote, they see an execution within it, that's what they care about. So, we are aligned in that thinking. When it comes to the cost and the expense of rule six eleven, 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. So if there's any sort of change in six eleven, if there's any sort of reduction in the number of exchanges, as a result of removal of six eleven, then that'll be a reduction of cost, you would hope, for those small and mid-sized firms. And also, for the benefit of those firms, this is just going to push these exchanges to innovate more, which gives them more opportunity to you know, have exciting opportunities with their for for their customers.

I would agree, and I think that's the right positive market pressure we wanna 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 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. Changes to rule six eleven that would take place imminently, and I believe the commission should consider delaying the compliance dates for rule six ten and six twelve, so firms don't have to rebuild their system twice here. If the SEC scraps rule six eleven, what reform should be made so we can improve the market without knocking out the legs from under it?

Thank you, Congressman. I 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 in business public tax and I get it. Um, so I I want everyone to be able to succeed. And I will tell you what ha- to answer your question directly, six eleven has to go down with six ten if it moves. Has to. And we've we've kind of talked a bit about that. I want to talk about the importance of rebates. I wanted to bring it back to one thing. You know, Mister had said, well, if the rebate goes lower then people can access liquidity. And I'm gonna bring it back to your question. Well, just to give you an example, one of those smaller equity exchanges, 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 thirty cents per hundred, which you see thrown around a lot, oh it's thirty cents per hundred, it should go lower, we pay seventeen per hundred. And guess what? You 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 Sen- uh Congressman Vargas mentioned, you know, off the off-exchange trading. We wanna 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, and 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. We wanna be able to attract Matt Billings-Float 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 suggest.

Thank you, Mister Kennedy, and I would just like to submit a letter for the record from SIFMA that also calls for a pause on those dates as you hide. I yield my time back to the chairwoman. Thank you.

So ordered, gentleman yields back, and now the chair recognizes the gentleman from Montana, Mister Downing, for five minutes.

Well, uh, thank you, Madam Chair. Uh, we're in the home stretch, so thanks to the witnesses as well. Uh, 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 um, uh, zero commission securities. Many people, you know, take those for granted in the United States. And ju- just a quick one for Mister Billings. Uh, 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. I would wanna 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 services that we provide and all the customer support and everything such as that nature and and and and how we conduct our business so we want to be cautious about anything that would touch payment forward flow in regards to that

right well 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 gonna move to mister kennedy here If 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. That 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.

Right.

We are today. We're attracting the largest IPOs. We are having global investors implore us to come and trade twenty-three hours, twenty-four 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. And 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 market says advanced far beyond what it was when regulation national market system, or reg NMS, was initially adopted in two thousand five. Accordingly, we need policies that match the speed of innovation. Um, I'm gonna go to Professor uh Battaglio, Dr. Battaglio. Uh what uh technological advancements have occurred in the decades since REG NMS passed that warrant revamping revamping the rule to insure that regulations are keeping pace with the markets?

I guess the biggest technological, I mean just the f- 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 snapshots. of their proprietary feeds because if regulators, and like the SEC back in the two thousands, use SIP data, it's gonna look like there's just massive trade-throughs.

Right, right. Thank you. Uh, move on from my last question, Mister Kennedy. Are there specific equity market structures in Europe or Asia that the US should emulate to remain the global leader? And conversely, is US over-regulation currently dri- driving liquidity to overseas, uh, quote, dark venues?

I think our over-regulation is not a factor just yet. In fact, as much as we all want deregulation, I think we have to 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 they're everyone's trying to copy us.

Yeah, that's what I think.

Can I just jump in there as uh A native Montanan and graduate of Great Falls High School,

Please do.

nineteen ninety nine.

I know I like you.

Um, I Optiver is headquartered in the in the Netherlands and Amsterdam. I just wanted to add that European policymakers have routinely considered whether to implement a trade-through rule similar to six eleven. 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 on that. Uh, Madam Chair, I yield.

Gentleman 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 then June twenty fourth twenty twenty six this hearing is now adjourned