Yesterday the House Financial Services Committee held a hearing on the SEC's equity market structure proposals - needless to say just from the title of the hearing (Solutions in Search of a Problem), this was a completely biased hearing with pre-judged conclusions.

Ordinarily I'd encourage you to watch something like this, and you're welcome to, but my final tweet on it kind of sums it up: "Hearing is over. Anyone who listened to it is that much dumber. Myself included."

The three pending equity market structure proposals (which We The Investors broadly support, with reasonable changes) are:

• Regulation NMS (new quoting/trading increments, access fee cap and market data improvements)
• Regulation Best Execution (a best ex standard for the SEC to enforce, instead of the current FINRA/MSRB rules)
• Order Competition Rule (OCR: would push most marketable retail orders away from wholesalers and on to lit exchanges)

Still, here's a bit of a report/overview of the hearing. There were five witnesses:

I don't know Kevin Kennedy or Ari Rubenstein, but the other three I know well. Generally speaking, I think they're thoughtful people on market structure, and of course I tend to agree very much with John from IEX (less so with Justin Schack, and unfortunately very little with what Professor Brogaard said). But I think overall the hearing missed a voice to provide the kind of support that these proposals deserve. Because they're overall decent proposals, with broad support for the most part, but are being mischaracterized and misrepresented.

There were a couple of consistent themes to the hearing:

• Stall any new rules as much as possible. The primary red herring here was focused on Rule 605, which was recently adopted by the SEC - but which does not become effective for 18 months. Many members of Congress and most of the witnesses (except for IEX) said that the SEC should wait for Rule 605 in order to pass any new rules, and that the SEC had used existing (outdated) Rule 605 reports in their justification for the other new rules. This is, of course, completely false, and it was disappointing to see it repeated by the witnesses. They all know that the SEC, while it sometimes cited current Rule 605 reports, nearly always acknowledged their shortcomings, and supplemented the analysis with CAT data. The SEC does not need Rule 605 data - that data is for public disclosure to aid investors choices based on market/execution quality. The SEC has access to CAT data, and provided an unprecedented level of transparency and analysis in the rule proposals.
• Mischaracterization of rule impacts. Regulation Best Ex was the primary victim here, although Nasdaq made several points on the access fee cap that could fall under this. Most witnesses said that FINRA's approach to Best Ex is sufficient, and that the SEC doesn't need its own rule to enforce (if the SEC wants to take over enforcement of Best Ex, of course it DOES need its own rule). Witnesses also lamented the confusion that would result in the industry from having multiple Best Ex rules (they ignored the fact that FINRA has already said it would change its rule so there would be no conflicts between its rule and the SEC's rule). Once again, misinformation was rampant.
• Ignoring and cherry-picking data. For the Order Competition Rule, there was constant defense of the current system of wholesalers and PFOF. Professor Brogaard especially made the claim that there was ample competition between wholesalers (this is quantitatively untrue, and has been shown as such through multiple studies) and that retail investors would be worse off if their orders were sent to lit exchanges where they could be competed over (this is just a silly claim). The same old tropes were repeated about wholesalers providing good execution in low liquidity names (they don't) and that they are providing some magical service that could not possibly be replicated in a competitive, open environment (again, untrue). The tick size pilot was cited as a massive failure (it wasn't, it was just poorly designed, but there's plenty of good data in it showing the benefits of both a trade-at rule and of engineering tick sizes intelligently).

One important point worth mentioning - John from IEX consistently told the Committee that the SEC did not need any additional analysis, and he defended the Reg NMS changes well. He made a compelling case for those updates, which is easy because they're good changes that nearly everyone supports. Except for Nasdaq and the other exchanges, who have been vocal in their opposition.

I don't think it's worth repeating my entire Twitter thread on the hearing - you're welcome to check it out if you want the full play-by-play. Instead, I'll leave you with this image I used to fact check the claim made by one of the witnesses and one of the members of Congress that the SEC has not had enforcement actions against PFOF brokers because the system is so good, which is obviously untrue: