[House Hearing, 115 Congress]
[From the U.S. Government Publishing Office]


                                              

 
                  U.S. EQUITY MARKET STRUCTURE PART I:

                  A REVIEW OF THE EVOLUTION OF TODAY'S

                      EQUITY MARKET STRUCTURE AND
                      
                            HOW WE GOT HERE

=======================================================================

                                HEARING

                               BEFORE THE

                    SUBCOMMITTEE ON CAPITAL MARKETS,
                       SECURITIES, AND INVESTMENT

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                     ONE HUNDRED FIFTEENTH CONGRESS

                             FIRST SESSION

                               __________

                             JUNE 27, 2017

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 115-24
                           
                           
                           
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]





                    U.S. GOVERNMENT PUBLISHING OFFICE
                   
 28-221 PDF                 WASHINGTON : 2018      
                           
                           
                           

                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                    JEB HENSARLING, Texas, Chairman

PATRICK T. McHENRY, North Carolina,  MAXINE WATERS, California, Ranking 
    Vice Chairman                        Member
PETER T. KING, New York              CAROLYN B. MALONEY, New York
EDWARD R. ROYCE, California          NYDIA M. VELAZQUEZ, New York
FRANK D. LUCAS, Oklahoma             BRAD SHERMAN, California
STEVAN PEARCE, New Mexico            GREGORY W. MEEKS, New York
BILL POSEY, Florida                  MICHAEL E. CAPUANO, Massachusetts
BLAINE LUETKEMEYER, Missouri         WM. LACY CLAY, Missouri
BILL HUIZENGA, Michigan              STEPHEN F. LYNCH, Massachusetts
SEAN P. DUFFY, Wisconsin             DAVID SCOTT, Georgia
STEVE STIVERS, Ohio                  AL GREEN, Texas
RANDY HULTGREN, Illinois             EMANUEL CLEAVER, Missouri
DENNIS A. ROSS, Florida              GWEN MOORE, Wisconsin
ROBERT PITTENGER, North Carolina     KEITH ELLISON, Minnesota
ANN WAGNER, Missouri                 ED PERLMUTTER, Colorado
ANDY BARR, Kentucky                  JAMES A. HIMES, Connecticut
KEITH J. ROTHFUS, Pennsylvania       BILL FOSTER, Illinois
LUKE MESSER, Indiana                 DANIEL T. KILDEE, Michigan
SCOTT TIPTON, Colorado               JOHN K. DELANEY, Maryland
ROGER WILLIAMS, Texas                KYRSTEN SINEMA, Arizona
BRUCE POLIQUIN, Maine                JOYCE BEATTY, Ohio
MIA LOVE, Utah                       DENNY HECK, Washington
FRENCH HILL, Arkansas                JUAN VARGAS, California
TOM EMMER, Minnesota                 JOSH GOTTHEIMER, New Jersey
LEE M. ZELDIN, New York              VICENTE GONZALEZ, Texas
DAVID A. TROTT, Michigan             CHARLIE CRIST, Florida
BARRY LOUDERMILK, Georgia            RUBEN KIHUEN, Nevada
ALEXANDER X. MOONEY, West Virginia
THOMAS MacARTHUR, New Jersey
WARREN DAVIDSON, Ohio
TED BUDD, North Carolina
DAVID KUSTOFF, Tennessee
CLAUDIA TENNEY, New York
TREY HOLLINGSWORTH, Indiana

                  Kirsten Sutton Mork, Staff Director
      Subcommittee on Capital Markets, Securities, and Investment

                   BILL HUIZENGA, Michigan, Chairman

RANDY HULTGREN, Illinois, Vice       CAROLYN B. MALONEY, New York, 
    Chairman                             Ranking Member
PETER T. KING, New York              BRAD SHERMAN, California
PATRICK T. McHENRY, North Carolina   STEPHEN F. LYNCH, Massachusetts
SEAN P. DUFFY, Wisconsin             DAVID SCOTT, Georgia
STEVE STIVERS, Ohio                  JAMES A. HIMES, Connecticut
ANN WAGNER, Missouri                 KEITH ELLISON, Minnesota
LUKE MESSER, Indiana                 BILL FOSTER, Illinois
BRUCE POLIQUIN, Maine                GREGORY W. MEEKS, New York
FRENCH HILL, Arkansas                KYRSTEN SINEMA, Arizona
TOM EMMER, Minnesota                 JUAN VARGAS, California
ALEXANDER X. MOONEY, West Virginia   JOSH GOTTHEIMER, New Jersey
THOMAS MacARTHUR, New Jersey         VICENTE GONZALEZ, Texas
WARREN DAVIDSON, Ohio
TED BUDD, North Carolina
TREY HOLLINGSWORTH, Indiana


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    June 27, 2017................................................     1
Appendix:
    June 27, 2017................................................    71

                               WITNESSES
                         Tuesday, June 27, 2017

Lyons, Matt, Senior Vice President and Global Trading Manager of 
  The Capital Group..............................................     5
Saluzzi, Joseph, Partner of Themis Trading, LLC..................     7
Rubenstein, Ari, Chief Executive Officer of Global Trading 
  Systems........................................................     9
Brown, Jeff, Senior Vice President, Legislative and Regulatory 
  Affairs for Charles Schwab.....................................    11
Farley, Thomas, President of the New York Stock Exchange.........    39
Katsuyama, Brad, Chief Executive Officer of The Investors 
  Exchange.......................................................    41
Concannon, Chris, President and Chief Operating Officer of the 
  Chicago Board of Options Exchange..............................    43
Comerford, John, Head of Global Trading and Research of Instinet.    45
Wittman, Tom, Executive Vice President and Global Head of 
  Equities for NASDAQ............................................    47

                                APPENDIX

Prepared statements:
    Brown, Jeff..................................................    72
    Comerford, John..............................................    78
    Concannon, Chris.............................................    84
    Farley, Thomas...............................................    91
    Katsuyama, Brad..............................................    97
    Lyons, Matt..................................................   109
    Rubenstein, Ari..............................................   123
    Saluzzi, Joseph..............................................   139
    Wittman, Tom.................................................   150

              Additional Material Submitted for the Record

Huizenga, Hon. Bill:
    Report from The Committee on Capital Markets Regulation 
      entitled, ``The U.S. Equity Markets: A Plan for Regulatory 
      Reform''...................................................   165
Huizenga, Hon. Bill:
    Statement from Tyler Gellasch, Executive Director of The 
      Healthy Markets Association................................   397


                  U.S. EQUITY MARKET STRUCTURE PART I:

                      A REVIEW OF THE EVOLUTION OF

                    TODAY'S EQUITY MARKET STRUCTURE

                          AND HOW WE GOT HERE

                              ----------                              


                         Tuesday, June 27, 2017

                     U.S. House of Representatives,
                           Subcommittee on Capital Markets,
                                Securities, and Investment,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to notice, at 10:04 a.m., in 
room 2128, Rayburn House Office Building, Hon. Bill Huizenga 
(chairman of the subcommittee) presiding.
    Present: Representatives Huizenga, Hultgren, Wagner, 
Poliquin, Hill, Emmer, Mooney, MacArthur, Davidson, Budd, 
Hollingsworth, Hensarling, Maloney, Sherman, Lynch, Scott, 
Himes, Ellison, Foster, Sinema, Vargas, and Gottheimer.
    Also present: Representative Loudermilk.
    Chairman Huizenga. This hearing of the Subcommittee on 
Capital Markets, Securities, and Investment is called to order. 
Without objection, the chair is authorized to declare a recess 
of the committee at any time. This hearing is entitled, ``U.S. 
Equity Market Structure Part I: A Review of the Evolution of 
Today's Equity Market Structure and How We Got Here.''
    We have a busy day ahead of us.
    We have two panels, and we are going to get rolling here. 
So without objection, as well, the gentleman from Georgia, Mr. 
Loudermilk, is permitted to participate in today's subcommittee 
hearing. Mr. Loudermilk is a member of the Financial Services 
Committee, and we appreciate his interest in this important 
topic.
    I now recognize myself for 3 minutes to give an opening 
Statement. Modern equity markets trace their origin back to an 
agreement signed under the buttonwood tree on Wall Street in 
1792, but over time these markets have become central to Main 
Street as well.
    Companies all around the world need access and the ability 
to raise capital for job creation, to grow their businesses, 
and to innovate. Additionally, hardworking Americans rely on 
the capital markets to save for everything from college tuition 
to retirement.
    In 1975, Congress amended the Securities and Exchange Act 
of 1934 and directed the Securities and Exchange Commission 
(SEC) to establish a national market system in which all orders 
to buy and sell securities would interact.
    Since that time, the structure of the U.S. equity markets 
has significantly evolved. Today's modern U.S. equity market 
structure has been shaped by four regulatory initiatives 
promulgated by the U.S. Securities and Exchange Commission: 
Order Handling Rules in 1996, Regulation ATS in 1998, 
Decimalization in 2000, and Regulation NMS in 2005.
    Since 1975, there have been technological advances, as we 
all know, as we peer at our iPhones and other electronic 
devices, and today a significant amount of trading is now 
performed by automated computer algorithms used by many 
different market participants.
    These participants include electronic market makers and 
high-frequency traders who seek to capture small profits from 
thousands of individual trades.
    These market participants also include large institutions 
seeking to accumulate significant positions without affecting 
the market and they include broker dealers seeking to provide 
retail investors with the best executions for their order. As 
trading has become increasingly automated, market activity is 
now measured in milliseconds and microseconds.
    By most objective measures, execution speeds, bid-ask 
spreads, trading costs, and market depth and liquidity 
investors have benefited significantly from the development of 
more competitive equity markets and the rise of electronic 
trading. These improvements, however, do not mean that the 
current structure and operation of these markets is perfect.
    Some critics of the current market structure have pointed 
out that with around a dozen public exchanges and 50 
alternative trading venues, today's equity markets are overly 
complex and fragmented. Others point to technical problems that 
have disrupted markets as evidence that the current market 
structure is not optimal.
    We all acknowledge that the U.S. equity markets are widely 
recognized for being the deepest, most liquid and most 
competitive markets in the world.
    However, it doesn't mean that these markets are perfect and 
there is room for improvement. That is why a truly 
comprehensive review of equity market structure is long 
overdue.
    Today's hearing will review the current state of U.S. 
equity markets and review how the current structure has evolved 
since the enactment of the Securities Acts Amendments of 1975. 
We will hear from industry participants and experts on what is 
working well in today's equity markets, as well as areas that 
need improvement or impacting the optimal functioning of the 
markets.
    In order to move markets forward, we need to know where 
they have been. As a Michigan member, we often talk in car 
analogies, and I would like to say in order to look forward 
through the windshield, we first must take a glimpse in the 
rearview mirror. I look forward to hearing from our witnesses 
today.
    And the chair now recognizes the ranking member of the 
subcommittee, the gentlelady from New York, Mrs. Maloney, for 5 
minutes for an opening statement.
    Mrs. Maloney. Thank you. Thank you very much. I thank our 
witnesses for being here and the chairman for holding this 
important hearing. The United States has the deepest, most 
liquid, and most efficient capital markets in the world. The 
strength of our markets is a key contributor to our country's 
overall economic strength.
    But we can always look at how we can improve them. We need 
to continually work to make sure that our markets are safe, 
competitive, innovative, and fair to all investors.
    The purpose of this hearing is to review the evolution of 
our equity market structure, and of course this discussion 
would not be complete without a discussion of the SEC's 
Regulation National Market System, NMS, which fundamentally 
overhauled market structure in the U.S..
    When the SEC passed Reg NMS 12 years ago--in fact it will 
be exactly 12 years ago this Thursday--the goals were to 
promote price competition, protect investors, and enhance 
market efficiency.
    After 12 years, it makes sense to take a step back, review 
the changes that have taken place and ask what did we get right 
in Reg NMS, what did we get wrong, and what can we improve?
    But first, it is important to remember that our equity 
markets are undoubtedly better today than they were a decade 
ago. Today's retail investors have better access to the markets 
at lower costs than ever before, and we should not lose sight 
of these benefits. However, our markets are by no means 
perfect, and I strongly believe that improvements can and 
should be made.
    In order to identify potential improvements, we must review 
what has changed as a result of Reg NMS and whether those 
changes were intended or unintended.
    Price competition has undoubtedly increased, as the number 
of different trading venues available to investors has 
exploded. Some in the markets argue that this price competition 
has come at the expense of market efficiency.
    However, as the large number of trading venues has led to 
fragmented markets, there is obviously a fine line between too 
many trading venues and too few trading venues. Whether we have 
the right balance is one of the issues that I hope we will 
explore today.
    As a few of the witnesses note in their testimony today, 
Reg NMS also promoted market-wide price competition, which 
undoubtedly lowered costs for investors, but also gave rise to 
high-frequency trading and prioritized speed over all else.
    Another lesson from Reg NMS is that even small changes in 
market structure regulations can have large consequences. That 
is why I think that the best changes in market structure will 
be grounded in data and empirical evidence.
    I am pleased that the SEC is currently conducting a Tick 
Size Pilot Program to test whether increasing the minimum 
trading increments will really enhance liquidity. This Tick 
Size Pilot has gotten off to a bumpy start and the 
implementation costs were high, but I am hopeful that it will 
yield solid data that we can use to improve the market 
structure.
    Finally, Reg NMS made so-called NMS plans much more 
important, which is the source of much controversy and which I 
think we will hear a lot about today.
    NMS plans are essentially committees that administer key 
parts of the National Market System such as the public data 
feeds that show the best available price for each stock. These 
NMS plan committees are comprised of self-regulatory 
organizations, essentially the exchanges in the Financial 
Industry Regulatory Authority (FINRA).
    Neither the sell-side brokers nor the buy-side investors 
have a seat on these NMS plan committees and therefore don't 
get a vote on how these plans are operated. As I said, this is 
the source of much controversy.
    I am pleased that we have all of the parties in this debate 
here with us today, and I hope that we could have a robust 
discussion of this issue.
    I look forward to the testimony from both of our panels, 
and I yield back.
    Chairman Huizenga. The gentlelady yields back.
    The chairman recognizes the gentleman from Illinois, the 
vice chairman of the subcommittee, Mr. Hultgren, for 2 minutes 
for an opening statement.
    Mr. Hultgren. Thank you, Chairman Hensarling, for convening 
this important hearing today. Thank you to all of our 
panelists.
    Many of the issues we discuss in this subcommittee are 
somewhat detailed, and I would say the discussion today will 
even be more detailed and complex, but it is important for us 
to understand. Congress has a responsibility to ensure that our 
equity markets are structured in a way that maximizes capital 
formation for job creators and protects the interest of 
investors saving for retirement.
    Since serving in Congress, the publication of ``Flash 
Boys'' piqued my interest in trying to better understand our 
equity markets. I did not come to the same conclusion as the 
author of the book, that our markets are rigged, but it did 
bring some of these issues to the forefront for public debate, 
which I think is important.
    As Congress and the SEC review the rules governing our 
market structure, it is important we are all on the same page 
in terms of our objectives.
    By many measures our equity markets are operating more 
efficiently than they ever have. Spreads and execution costs 
are the lowest they have ever been, meaning it is more 
affordable for retail investors to participate in markets, 
which historically, were only accessible to the most 
sophisticated investors.
    However, it is also worth noting that a number of 
significant events have shaken investor confidence, which is 
foundational to our markets. For example, I remember visiting 
with a number of firms in Chicago on August 24, 2015 when there 
was great volatility and at the time an inexplicable 
dislocation between the prices of exchange-traded funds and 
their underlying securities.
    There are a lot of issues that merit discussion today, 
whether it is market pricing structures, speed bumps, market 
data, or order routing, but no aspect of our market structure 
should be debated in a silo. They are all far too 
interconnected.
    I believe our equity markets are functioning well, but if 
we do not continue to review opportunities for improvement, it 
may not be long before the United States leadership begins to 
falter.
    To that point, as European regulators implement Markets in 
Financial Instruments Directive (miFID) II, our regulators 
should be engaged in the policy implications and take 
appropriate steps so the U.S. capital markets remain 
competitive.
    While Congress will undertake its own work, I am looking 
forward to your feedback on the work of the SEC and its Equity 
Market Structure Advisory Committee.
    Thank you again to all of our witnesses. I look forward to 
reviewing and discussing the recommendations detailed in your 
testimony.
    I would also be remiss in not mentioning that Chris 
Concannon, President and COO of the Chicago Board of Options 
Exchange, is testifying today. CBOE recently acquired Bats, 
which I believe, will be a great help to Chicago to continue 
its role as a leader in the Midwest for finance.
    With that, I yield back.
    Chairman Huizenga. The gentleman's time has expired.
    As we start on this, I do want to say that today we have a 
busy day. We have two panels that are going to be happening, 
but this is actually based off of some of the work that our 
previous Chairman of the Capital Markets Subcommittee, Scott 
Garrett, had done. He convened some roundtables and really had 
started to get this conversation going.
    I think that this an important time for us to work on a 
bipartisan basis to see where we could go to what these markets 
might look like for the future.
     Today, we are very pleased to welcome on this first panel, 
Matt Lyons, who is the Senior Vice President and Global Trading 
Manager of The Capital Group on behalf of the Investment 
Company Institute; Joseph Saluzzi, partner of Themis Trading, 
LLC.; Ari Rubenstein, CEO of Global Trading Systems; and Jeff 
Brown, Senior Vice President, Legislative and Regulatory 
Affairs for Charles Schwab, and he is here on behalf of the 
Securities Industry and Financial Markets Association.
    Part of what I wanted to do was to get these participants 
in first and then our second panel, which is going to consist 
of Thomas Farley, President of the New York Stock Exchange; 
Brad Katsuyama, CEO of The Investors Exchange; Chris Concannon, 
as was referenced, President and COO of the Chicago Board of 
Options Exchange; John Comerford, Head of Global Trading and 
Research of Instinet; and Tom Wittman, Executive Vice President 
and Global Head of Equities for NASDAQ.
    I wanted to get those participants in first and then get 
those who are running the markets in for our second panel. We 
are going to have a busy day, and I really appreciate all of 
the time that you are giving us here today.
    With that, I will recognize Mr. Lyons first for an opening 
5-minute statement.

                     STATEMENT OF MATT LYONS

    Mr. Lyons. Thank you, Chairman Huizenga, Ranking Member 
Maloney, and the rest of the subcommittee. I just want to 
extend my thanks for inviting me to testify today about these 
important issues.
    My name is Matt Lyons. As you mentioned, I am the global 
trading manager of the Capital Group company. It is the home of 
the American Funds. Capital Group manages more than $1.5 
trillion in equity and fixed income assets on behalf of 
millions of investors for institutions and individuals.
    The Capital Group is an active investment manager who 
employs fundamental analysis and has a singular focus on 
delivering superior long-term results to our clients. I also 
chair the Investment Company Institute's (ICI's) Equity Market 
Advisory Committee.
    ICI members are regulated funds including mutual funds, 
exchange traded funds, closed end funds, unit investment 
trusts, and its members represent more than 95 million 
individual investors, retail investors, representing over $19 
trillion in assets.
    My personal experience has been gained--I have personal 
experience which has been gained working in the equity markets 
for the past 30 years of my career.
    Regulated funds, such as the funds managed by the Capital 
Group, play a critical part in capital formation in the United 
States. These funds invest in the equity markets on behalf of 
millions of retail investors saving for their long-term 
financing goals.
    We applaud the subcommittee for looking at the state of the 
equity markets today. I believe we offer a unique perspective 
on behalf of the millions of clients we serve and our 
commitment to improving their long-term investment outcomes.
    Regulated funds are specifically aligned with the 
objectives of the National Market System. That is to serve the 
interest of long-term investors and listed companies.
    As an initial matter, I would like to say that the U.S. 
equity market is among the fairest, most efficient, and most 
competitive markets in the world. It allows companies to raise 
capitals, to create jobs, to grow their business, and innovate.
    Key elements of today's equities market structure stem from 
the 1975 amendments to the Security Exchange Act and Regulation 
NMS. Although this legal framework has contributed to 
efficiency of the markets, I believe it is overdue for an 
inspection.
    We believe the SEC should lead the efforts to examine and 
improve equity market structure while keeping in mind the key 
objectives of Reg NMS to serve the interests of long-term 
investors and listed companies.
    To that end, the SEC should prioritize reforms that will 
minimize conflicts of interest and promote transparency in the 
equity markets. I have made six recommendations in my written 
testimony, but I will highlight three areas that I think need 
particular attention.
    The first is prevalent pricing model in the U.S. equity 
markets known as maker-taker, which involves charging fees to 
participants that remove liquidity while paying rebates to 
those participants who add liquidity.
    This fee structure results in an inherent conflict of 
interest, potentially aligning the brokers' economic interests 
against those of their customers. Broker dealers have an 
incentive to route client orders in a way that maximizes 
rebates or minimizes fees and even if this results in a 
suboptimal outcome for their customer.
    The SEC should conduct a pilot program to evaluate how 
access fees and liquidity rebates affect trading in highly 
liquid stocks. An effective pilot program would examine whether 
investors benefit from a market structure with lower access 
fees and in particular, zero rebates.
    NMS plan governance also needs reform. The plans administer 
key aspects of market structure and affect all market 
participants, but they are controlled by self-regulatory 
organizations that may have conflicts of interest.
    Other market participants, such as regulated funds, lack 
any meaningful voice in the plan operations. NMS plan governing 
bodies would be far better informed and better able to police 
the conflicts of interest if they included non-SROs including 
representative of regulated funds.
    The third area that must be addressed is the lack of 
transparency that institutional investors have into the order 
handling activities of broker dealers and the operation of 
alternative trading systems. Today, stocks trade on roughly 
four dozen platforms, each with its own set of rules, order 
types, and unique fee schedule.
    In this fragmented and complex market structure, the order 
routing decisions, and by extension, the choice of execution 
venue, are extremely important to assessing execution quality, 
reducing information leakage and improving returns for fund 
investors.
    Unfortunately, the securities laws provide investors with 
inadequate information about either broker order, handling 
practices or the operation of ATSes making it difficult for 
regulated funds to monitor broker dealers and trading venues. 
We believe that all institutional investors should have access 
to detailed information concerning the handling of their 
orders.
    Likewise, all market participants should have information 
about how ATSes operate. The SEC has proposed rules that would 
greatly enhance transparency in these areas, and we urge the 
Commission to finalize these rules without delay.
    The conflicts of interest inherent in maker-taker pricing 
and the governance of NMS plans and the opacity surrounding 
broker dealer ordering handle practice in ATS operations, work 
to undermine the fairness and integrity of our equity markets.
    These practices harm long-term investors, including the 95 
million Americans who invest in regulated funds. Regulators and 
market participants should address these issues promptly and to 
modernize equity market structure and to create the market, 
better serving the interest of long-term investors and listed 
companies. I am happy to answer any questions that you have.
    [The prepared statement of Mr. Lyons can be found on page 
109 of the Appendix.]
    Chairman Huizenga. The gentleman's time has expired.
    I should mention as well, which I neglected to do, that 
your written testimoneys will be put into the record without 
objection as well. As we are going to be gathering, not 
everybody is going to agree on these panels either as well, and 
so we think this is a good time and a good thing to be 
exploring.
    With that, Mr. Saluzzi, you are recognized for 5 minutes.

                   STATEMENT OF JOSEPH SALUZZI

    Mr. Saluzzi. Thank you, Chairman Huizenga, Ranking Member 
Maloney, and members of the subcommittee for giving Themis 
Trading the opportunity to testify on this important topic. We 
want to applaud the subcommittee for taking the time to examine 
and question the functioning of our equity market structure, 
even in this time of relatively low volatility when complacency 
can sometimes take hold.
    We believe that the time to be asking tough questions is 
exactly now while the market is not under stress as it was in 
2008 through 2010. My name is Joseph Saluzzi. I am a partner 
and co-founder of Themis Trading. We are a no-conflict, 
institutional agency broker.
    We do not make markets. We do not trade proprietarily. We 
do not own a dark pool. Our only business is providing best 
execution for our institutional clients. We are agents for 
long-term investors who collectively manage well over $1 
trillion of long-term investor funds.
    My partner Sal Arnuk and I started Themis Trading in 2002 
to leverage our expertise in navigating the electronic 
landscape of trading. In the 1990s, we navigated in an 
environment in which regulators tried to rectify many of the 
problematic features of market structure at this time.
    In the 1990s, specialists had engaged in imperfect 
activity. NASDAQ market makers colluded in keeping bid-ask 
spreads artificially wide. In Themis, we hoped to grow a firm 
that utilized electronic tools to source liquidity for our 
clients in the cleanest and natural ways.
    By the mid 00s, we recognized that there was a new equity 
market structure forming with a multitude of ECNs, dark pools, 
trading venues, which was evolving in especially troubling 
ways. Complexity was rapidly increasing.
    A new breed of short-term, high-frequency trader was 
rising, a breed that evolved from many of what you would call 
were the SOES bandits of yesteryear. These traders were 
becoming the dominant form of liquidity in our markets, with 
business models built around arbitraging faster and slower 
quotes on different venues.
    These firms realized that seconds, milliseconds, and now 
microseconds mattered, and they realized to capitalize on their 
proprietary trading arbitrage, they needed the tools which were 
supplied by the stock exchanges, such as colocation, special 
order types, proprietary data feeds. I will try not to get into 
all of the jargon, but there is a lot of it and the details 
really do matter here.
    In our efforts to improve our trading for our clients, we 
began investigating under the hood how the stock market really 
worked. We expressed our concerns to our clients, to our 
regulators, to the industry in general.
    We also began sharing our concerns publicly. We wrote white 
papers. We have a Themis Trading blog that we run fairly 
actively now. We are active on social media. In other words, we 
are not quiet participants in this market structure debate.
    Our first white paper was titled ``Toxic Equity Trading.'' 
It was written in 2008. It is 2017, right, so we are still 
talking about this stuff. In 2012, we summarized our findings 
and published a book called ``Broken Markets.'' While not quite 
``Flash Boys,''--we didn't sell as many copies--we think the 
material is very important.
    Sadly, many of our concerns that we highlighted in the book 
are still a problem today. Today's stock market is comprised of 
13 stock exchanges, 12 active of those 13, 40 alternative 
trading systems. I won't bore you with all the details, we will 
get to those later, but the problem is is that they are not 
regulated with the same disclosure and the same practices 
yardstick.
    The fragmentation which escalated after the SEC passed Reg 
NMS is the source of most of our problems. While the SEC 
believed that Reg NMS would create competition among the stock 
exchanges, we are certain that they did not anticipate that 
their regulations would have resulted in a high-speed 
competition to trade against long-term investors.
    And we hope that the SEC didn't think that all this 
fragmentation and complexity would be a desired result, and I 
think most of my panelists and the next panel would agree that 
what we have right now is not what the SEC intended.
    Our modern markets are built on high-speed races around a 
fragmented web of liquidity. Our primary concern is how the 
stock exchanges have changed over time and since they have 
become for profit venues. Quite frankly, we think they have 
lost their way.
    They are no longer impartial referees, but instead are now 
players in the game with a vested interest in the outcome. Two 
exchange practices, which I will get into later, which are 
particularly harmful, we think, to investors, are, one, like 
Mr. Lyons said, is the maker-taker rebate model. This is the 
source of many conflicts of interest.
    The second is the proprietary data feeds, and we will get 
into that later as well, as I see I am running out of time. Our 
written testimony also covers other main concerns, which 
include dark pool disclosures; broker order routing 
disclosures; market maker obligations; payment for order flow 
for internalizers; the role of academic studies, which needs to 
be questioned; the revolving regulatory door, which needs to be 
questioned.
    Quite frankly, I have explained a lot of issues with our 
fragmented market structure. It is conflicted, it is complex 
and it would be naturally and competitively less so if 
regulators would act only some common sense reforms.
    We don't think an entire holistic review is necessary. 
Things like eliminating payment for order flow and reducing and 
restricting some of the information that is coming from these 
proprietary data feeds can go a long way in solving the 
fragmentation and the complexity that we have. With that, I 
would like to thank you, and I look forward to answering your 
questions.
    [The prepared statement of Mr. Saluzzi can be found on page 
139 of the Appendix.]
    Chairman Huizenga. Appreciate that.
    With that, Mr. Rubenstein you have 5 minutes.

                   STATEMENT OF ARI RUBENSTEIN

    Mr. Rubenstein. Thank you Chairman Huizenga, Ranking Member 
Maloney, and distinguished members of the committee. It is a 
real personal honor for me to be here today to discuss with you 
these important market structure issues and how we can work 
together to keep America No. 1 in capital markets and finance.
    You know, this summer, it will be 25 years ago that I 
started as a runner on the floor of the Commodities Exchange at 
the former World Trade Center, where the biggest piece of 
technology we had down there at the time was the telephone.
    It was about a decade later that I felt that technology 
could evolve our markets in ways that would bring enormous 
benefits for investors. It was at that point that I helped 
start my current company, GTS.
    GTS is an electronic market maker. We provide offers to buy 
and sell thousands of investment instruments electronically 
across global markets. All of our trading is quantitatively 
based and automated using computers.
    We are also the largest designated market maker, or DMM, at 
the New York Stock Exchange. This means we are uniquely and 
directly responsible and accountable to over 900 public 
companies for making sure there is ample liquidity available 
for their investors throughout the trading day, should they 
need it.
    That list includes some well-known companies such as 
ExxonMobil, Berkshire Hathaway, and AT&T. Most recently, we 
handled the IPO of the technology company Snapchat, which was 
the largest IPO over the last 3 years, and raised nearly $4 
billion for the company and its workers.
    Our goal at GTS is to do for the capital markets what 
Amazon has done for online commerce, use technology in a 
responsible way to promote more efficiency for public companies 
and save their investors money. We do this by adhering to our 
core principles of transparency and innovation. That yields 
investor confidence and lower costs.
    Our efforts help companies navigate the capital markets, 
raise capital, grow, and employ workers. We have witnessed the 
capital markets evolve tremendously since the days I was 
frantically on the floor of the exchange yelling, buying and 
selling orders.
    Like many industries, technology has transformed the 
business, and just like the conveniences and cost savings we 
all enjoy using the Internet and technology, the financial 
markets participate in the same way.
    For example, thanks to some smart regulation and the 
advanced technology electronic market makers have deployed, the 
cost to trade has gone down dramatically, by more than 50 
percent, in the last 10 years alone. According to Vanguard, due 
to today's reduced trading costs, investments in a mutual fund 
over a 30-year period will end up with a 30 percent higher 
return.
    There were concerns late last decade that the vulnerability 
of electronic systems would pose a threat to the markets. The 
SEC and FINRA enacted rules to address many of these issues. 
Market access rules, regulation SCI, the consolidated audit 
trial are all positive and necessary advancements to our 
markets, but there is more that needs to be done.
    The first is we shouldn't squander our resources trying to 
fix problems that don't exist. I have witnessed a lot of alarms 
being rang over the last few years for problems that really 
aren't there and then to hear solutions which are questionably 
positive in the grand scheme of things.
    One example is a recent proposal by one of the national 
securities exchanges to offer an alternative closing auction 
for securities listed on other markets. This is creating a 
little unease for public companies and their investors, which 
we are all here to serve. Any discussion about market structure 
ought to include the needs of our public companies.
    So here is what we should be spending our time on. First, 
more resiliency to cybersecurity. This is often overlooked in 
the debate about market structure, but an all-electronic 
market, like many other technology-dependent sectors in our 
economy, needs vigilance on this issue. We need to double down 
on our efforts to prevent hacking and cyberattacks, and a 
better system for sharing information between key stakeholders, 
because we all have a collective interest in preventing such a 
problem.
    Next, we need to do more to detect electronic trading fraud 
and abuse. I am a member of the FINRA Market Surveillance 
Advisory Group, whose goal is to assist FINRA in the 
construction of an advanced artificial intelligence and machine 
learning system to eradicate nefarious activity in our markets. 
This is a great and impressive start, but more time and budget 
is necessary to complete these projects.
    Finally, we need to further improve the securities 
information processor (SIP) market data feed. Investors need 
the most accurate information possible when making investment 
decisions. While investors and market participants have equal 
access to all publicly available data, the SIP is the most 
widely used and the least expensive solution. The perception of 
a SIP feed that operates at a significant disadvantage to 
direct feeds could eventually drain investor confidence.
    Our markets are stronger and more efficient than ever, and 
certainly the envy of the world, but we should not rest on our 
laurels. Thanks to the hard work of people from the industry 
and the regulatory bodies, we can deploy these changes from a 
position of strength. Thank you for this opportunity, and I am 
happy to answer any questions that you have.
    [The prepared statement of Mr. Rubenstein can be found on 
page 123 of the Appendix.]
    Chairman Huizenga. Thank you.
    Mr. Brown, you are recognized for 5 minutes.

                     STATEMENT OF JEFF BROWN

    Mr. Brown. Chairman Huizenga, Ranking Member Maloney, and 
distinguished members of the subcommittee, my name is Jeff 
Brown, and I am Senior Vice President and Head of the Office of 
Legislative and Regulatory Affairs for the Charles Schwab 
Corporation.
    It is my honor today to appear before the subcommittee on 
behalf of the Securities Industry and Financial Markets 
Association, otherwise known as SIFMA. SIFMA represents a broad 
range of financial services firms, including Schwab, that are 
active in our capital markets and dedicated to making our 
markets the best in the world.
    Congress first mandated the establishment of a national 
market system in 1975. At that time, most equity trading took 
place manually on the trading floor of an exchange. Today's 
market is fully electronic and automated with a vibrant 
ecosystem of competing market venues including more than a 
dozen exchanges and more than 40 alternative trading systems.
    Although advances in technology had a major role to play in 
the evolution of our markets, there have been three major 
regulatory developments since 1975 that have created the 
capital markets of today.
    First, in 1998 the SEC adopted Regulation ATS which 
established regulatory standards for alternative trading 
systems. The net result of Regulation ATS has been the growth 
of trading venues that offer varying business models and 
compete for per order flow to the benefit of all investors.
    Second, in 2001, decimal pricing began. After nearly 200 
years of a system in which equities traded in fractions, 
trading in pennies revolutionized our markets, spurring the 
rapid growth of electronic trading and increasing liquidity.
    Finally, in 2005, the SEC adopted Regulation NMS, which was 
predicated on the need to foster more efficient markets by 
prompting fair competition, while at the same time ensuring 
that the markets were linked together to encourage the 
interaction of and competition between the orders of buyers and 
sellers.
    The centerpiece of Regulation NMS is Rule 611, the Order 
Protection Rule. Simply stated, the rule was designed to ensure 
that displayed investor orders cannot be ignored or traded 
through. Together, these changes, both regulatory and 
technological, have created markets that are unrecognizable 
from the markets of 10 and 20 years ago.
    The markets today are highly automated and efficient, 
providing near instantaneous low-cost executions. Retail 
investors, Schwab's clients in particular, have benefited from 
an incredibly competitive and dynamic marketplace.
    There is one other historical shift that has played an 
important role in the development of today's market. In the 
early and mid-2000s, the national securities exchanges began to 
become for-profit companies instead of broker-dealer-owned 
utilities.
    Today, the largest exchanges are owned by publicly traded 
corporations. As such, they now have a fiduciary duty to 
deliver profits to their corporate shareholders. This has 
radically changed the incentives that exist in our capital 
markets and created conflicts of interest that remain 
unaddressed.
    While we understand and appreciate that the subcommittee 
intends to evaluate policy options at a later date, we would 
like to highlight two critically important areas that we 
believe policymakers need to address to deal with significant 
inefficiencies.
    First, we believe that the entire concept of self-
regulatory organizations, or SROs, and the National Market 
System plans which they control, need to be rethought. SIFMA 
believes that strong self regulation must continue to be an 
integral part of the oversight of our market and its 
participants.
    Exchanges, however, continue to act as SROs, even though 
they have become competitors with their former owners. In other 
words, for-profit companies act as regulators of the very 
market participants with which they directly compete.
    SROs also manipulate NMS plans to advance their commercial 
interest at the expense of the industry and the investors they 
serve. These conflicts of interest are obvious, and we believe 
Congress or the SEC need to move quickly to rethink the role 
and responsibilities of the SROs in light of this new reality.
    Second, we believe the market data system, the way 
investors receive bids, offers, last sales and other critical 
information that is the lifeblood of any effective market, 
remains locked in a 1970s structure and is in serious need of 
overhaul.
    Today, the exchanges offer their own market data streams 
faster and with far better and deeper information, but at 
sharply escalating fees. The consolidated data stream, which 
the industry must purchase by rule, is slower and contains only 
ephemeral top-of-book quotes. This structure has returned us to 
an era when privileged pros get access to better, more timely 
market information than ordinary investors.
    This outcome is absolutely contrary to all that has 
occurred over the last two decades of regulatory and 
technological development. We urge the SEC or Congress to 
address this glaring issue. Thank you for the opportunity to 
testify today, and I look forward to answering your questions.
    [The prepared statement of Mr. Brown can be found on page 
72 of the Appendix.]
    Chairman Huizenga. Thank you very much, I appreciate that.
    With that, I am going to recognize myself for 5 minutes for 
questionings.
    We talked about 1975 a bit here and what the SEC had done. 
The question I have regarding Reg NMS, I think is a big 
element, and I want to direct this to both Mr. Lyons and Mr. 
Brown very quickly because you are representing larger industry 
trade groups. Sort of what is working well with the current 
U.S. equity market structure, what are some areas that can be 
improved, but I would like to know what consensus really does 
the industry have as a whole? Are there some areas that we can 
address?
    Mr. Brown, why don't you?
    Mr. Brown. Thank you, sir. What is working well, 
particularly from Schwab's perspective, is the fact that, since 
Reg NMS, a market structure has evolved that allows retail 
investors to obtain far better price improvement and much 
better execution quality than exists if they were to flow 
through two exchanges.
    I really believe that innovation in itself has been a 
driver in maintaining the U.S. as a country that has the 
highest participation of individual investors in the world, 
and--
    Chairman Huizenga. So you are saying the cost of a trade?
    Mr. Brown. The cost of trading and the execution quality 
they receive.
    Chairman Huizenga. OK.
    Mr. Lyons, real quickly?
    Mr. Lyons. So I think technology and the regulation 
environment we work in today has really empowered the buy side, 
the people that I represent and the client that they work on 
behalf of, to have more control over the order and the 
direction of the order that they have. So I think that is a 
huge benefit.
    We have automatic access to information, it is much more 
relevant, so a lot of--
    Chairman Huizenga. Are you talking the retail investor or--
    Mr. Lyons. Yes, we--
    Chairman Huizenga --an institutional investor?
    Mr. Lyons --I mean, retail investors we represent. The 
regulated funds that I speak for represent over 95 million 
retail investors. That is really what they are.
    Chairman Huizenga. All right.
    Mr. Lyons. So it works well and it enables us to 
efficiently work in the markets. I think when I tried to stress 
both in my written and my oral testimony that where we fall 
short is in certain conflicts of interest that exist today, 
certainly in the broker routing practices and the maker-taker 
pricing scheme, and also around transparency of those broker 
order routing practices for us to be able to analyze more 
effectively the quality of the execution we receive from the 
brokers.
    Chairman Huizenga. OK.
    Mr. Lyons. In terms of a consensus, I am sorry, in terms of 
a consensus--
    Chairman Huizenga. Very quickly.
    Mr. Lyons --I think that a pilot in the maker-taker is 
about as close to a consensus that I have ever seen working in 
the industry.
    Chairman Huizenga. OK.
    Mr. Rubenstein, you talked about 25 years ago starting when 
phone was it, with technology advancements over the last 40 
years from 1975. I mean what should Congress take a look at 
statutorily, the statutory framework of equity market structure 
because of that technology?
    Mr. Rubenstein. Look, you are right, I mean when I was on 
the floor of the exchange, we liked to think we were really 
efficient down there on the floor, but looking at where the 
markets are now, the amount of intermediation has gone down 
tremendously, which is why all of the data suggests that we 
have the most efficient markets in the world that are saving 
retail investors money, institutional investors money, helps 
them save for retirement.
    But no surprise, right, because technology sort of does 
that? But--
    Chairman Huizenga. Does that lead to any kind of statutory 
framework that we ought to be looking at?
    Mr. Rubenstein. Well, I think one theme that is coming out 
of this hearing already is that while we have this great 
electronic market that is super-efficient, I think there are 
areas of disclosure and transparency that need to be improved.
    Like, if there are pricing schedules that exchanges have 
with their participants I think it is really important that 
brokers that have some sort of agency capacity or in any way, 
need to disclose all of those pricing schedules so investors 
can make informed decisions.
    Chairman Huizenga. OK. I have got 1 minute left and I have 
20 minutes of questions, unfortunately, and I would love to get 
to--Mr. Saluzzi doesn't believe a comprehensive review is 
needed. Both Commissioners Piwowar and Stein have called for 
comprehensive reviews, but we can address that later.
    NMS plan governance, Mr. Lyons and Mr. Brown, can you 
discuss the perceived benefits of allowing broker-dealers and 
asset managers to have direct voting representation on NMS plan 
operating committees. If you--very quickly, each.
    Mr. Brown. I would say that the introduction of brokers and 
asset managers into the NMS governing committees will certainly 
broaden the expertise that is brought to bear on a policy issue 
early in that discussion so that it can be pointed in a 
direction that is better for our markets.
    Chairman Huizenga. Mr. Lyons, real quickly.
    Mr. Lyons. Yes, I would agree in whole part with the 
suggestion that non-SRO members and the views that they bring, 
and for us representing the clients, the 95 million clients 
that we represent, would bring added benefit to those 
discussions. And to have a seat at the table would be very 
meaningful for them.
    Chairman Huizenga. OK. We usually reserve this for the end 
of the hearing, but we are going to allow for written followup 
questions. You will be receiving a few from me as well, things 
I would like to get through, and we just ask that the panel 
respond as promptly as possible with some of those.
    And with that, the ranking member here for 5 minutes.
    Mrs. Maloney. Thank you. That was a good set of questions. 
Anyway, first of all, this question is for Mr. Saluzzi. There 
has been a lot of talk about these so-called market-taker 
pricing, where exchanges pay rebates to brokers who send their 
orders to the exchange.
    Some say that this creates a conflict of interest by giving 
brokers an incentive to send their clients' orders to the 
exchange that pays them the highest rebate, rather than the 
exchange that gives them the best execution.
    The SEC's Equity Market Structure Advisory Committee 
(EMSAC) has recommended that the SEC do a pilot program to test 
whether market quality improves with lower rebates.
    Do you think the SEC should go ahead with this pilot 
program? If so, who should design the program, the SEC? Or 
should they delegate this to the Committee of Exchanges, like 
they did with the Tick Size Pilot Program?
    Mr. Saluzzi. Thank you, ranking member. Certainly not the 
exchanges. I mean, that is like putting the fox in the 
henhouse, OK. So the answer to that question, I would like the 
SEC to design a pilot. However, I think the access feed program 
that is being proposed, or been talked about, falls short of 
one critical area.
    There should be a no-rebate, as we call it, bucket. In 
other words, the source of the problems, the source of what we 
are talking about when it comes to fragmentation in various 
venues, are the brokers. The brokers are routing at various 
venues to collect higher rebates.
    This doesn't make any sense for best execution. Rebates 
should not be taken into account. So what we think a better 
model, rather than maker-taker, is a flat fee. Actually, there 
is one exchange currently doing this, IEX, where they charge on 
their non-displayed liquidity, 9 mils per share or nine-tenths 
of a penny whether you make or take.
    That collects, for them, 18 mils, which is a nice revenue 
capture, if you think about it. Based on the other exchanges, 
their revenue capture, since they have to pay a rebate and 
collect an access fee, is closer to 3 to 5 mils. So what I am 
suggesting is a raise for the exchanges. I think they should 
deserve more money for matching buyers and sellers.
    But rebates are distorters. They are clouding what brokers 
do. They are putting in unnecessary conflicts of interests. 
That is just one part of payment for order flow.
    There is a second half, which we haven't talked about, and 
that is where the market makers, who are off-exchange, will buy 
retail orders from firms like Charles Schwab and others, and 
they pay for that flow. They pay nine-tenths of a penny, 15 
mils, and have it based on the agreement that they have with 
that broker.
    We want to know, why would a market maker pay for order 
flow? And they are giving price improvement, as Mr. Brown said. 
Well, obviously, there is a catch here. Market makers want as 
much order flow as they possibly can, so they can read the 
direction of the market. But unfortunately, what this does is 
corrupts the order routing process from the retail broker side.
    I will give you one example of one thing that we really 
can't believe. There are some firms that can mark a retail 
order, OK, you can have it, identify it, go in through an 
exchange, and you can get an enhanced rebate for that exchange. 
In other words, more money, if you are willing to give up the 
fact that your client is a retail investor.
    Now, what does that mean? Oh, retail only trades 100 
shares. It really shouldn't matter, right? No, it does. You 
know why? Because it is not Mr. Lyons' order, and it is not my 
order representing an institution. And that means a lot.
    So what I am saying is, rebates, maker-taker, payment for 
order flow, these are all the sources of conflicts of interest 
that we have argued against for many years. So we are happy 
that the SEC has proposed this, but unfortunately, I think it 
may fall a little short of my suggestion. Thank you.
    Mrs. Maloney. OK, thank you. Mr. Lyons, you mentioned in 
your testimony that institutional investors need more and 
better information about how brokers handle your orders. The 
SEC proposed a rule last year that would require brokers to 
disclose much more information about their clients, about how 
they handle their orders. Your testimony today indicated that 
you support the SEC's proposed rule with certain modifications.
    So my question is, what modifications do you believe the 
SEC should make to the order handling disclosure rule? Second, 
what information would you get under the SEC's rule that you 
currently don't get from your own brokers?
    Mr. Lyons. Yes, thank you. We do think that this is an 
important proposal that should be acted on immediately on 
behalf of our clients. Specifically, the modifications have to 
do with the definition of an institutional order. We would 
really like to make sure that all of our orders are brought in 
under the program so that we can analyze that data coming back 
effectively.
    The real benefit that we get from the standardized format 
that has been developed and has really helped to be developed 
by the ICI in conjunction with other trade associations, who 
gave it to the SEC as a blueprint, if you will, on how this 
information could be used, is it allows us to efficiently 
process and make apples-to-apples comparisons across brokers 
and across venues, when it is in a standardized format, and in 
a way that we can easily digest, in an electronic format that 
we can process.
    Mrs. Maloney. Thank you. Thank you, thank you, thank you.
    Mr. Brown, you stated, in your testimony--oh, excuse me. My 
time is up. It is such an interesting--
    Chairman Huizenga. I know.
    Mrs. Maloney. I think we are going to have to have a second 
round.
    Chairman Huizenga. The--
    Mrs. Maloney. Sorry. I am sorry.
    Chairman Huizenga. The chair was going to have a very light 
gavel. So if the ranking member would like to finish her last 
question quickly.
    Mrs. Maloney. No, that is OK.
    Chairman Huizenga. OK. All right.
    Mrs. Maloney. Let us respect the time.
    Chairman Huizenga. All right. Well, I appreciate that.
    So with that, I would like to recognize the vice chairman 
of the committee, Mr. Hultgren from Illinois, for 5 minutes.
    Mr. Hultgren. Thank you, Mr. Chairman.
    Again, thank you all for being here. I want to address my 
first question to Mr. Lyons, if I could. Your testimony 
includes recommendations that ATSes disclose information about 
their operations and operators. You specifically mention 
preferential access for certain market participants and the 
potential for conflicts of interest by the operator.
    I wonder, can you explain why these disclosures should not 
be voluntary? Can't you elect to use ATSes that disclose the 
information that you are seeking? Additionally, doesn't Capital 
Group oftentimes benefit from these unlit trading venues to 
execute large trades?
    Mr. Lyons. Yes, another great question. So I think that the 
proposal requires a standardized response for the questions 
that we asked the ATS operators that we interact with today. We 
go through a great deal of scrutiny over our brokers, who they 
route to, and what venues they expose our orders to.
    We are very concerned about things like information leakage 
throughout the process. So there are benefits to ATSes that are 
unlit. Mostly, those accrue to us in large-block transactions.
    But in order to engage in a meaningful discussion, so that 
our clients are better served as they interact with all these 
different ATSes, it is important for us to have information 
about how they operate.
    I don't think that disclosing ATS operations is any more of 
a burden than what the SROs do today. I think in today's 
market, where they are really effectively competing with each 
other, why do we need to have separate standards of disclosure 
between ATSes and exchanges anymore?
    Mr. Hultgren. I think you touched on this a little bit in 
your answer there, but just to drill a little deeper, can you 
explain how this interacts with your recommendations for 
requiring broker-dealers to provide institutional investors 
with more granular disclosure about order routing activities, 
and more specifically, what information should this include?
    Mr. Lyons. So the real important aspect of the proposal for 
the order handling disclosure rule is for us to be able to get 
more detailed information, not only about where our executions 
are taking place, which we get pretty readily, and it is 
available through the technology enabled in the markets, but 
really, how much of our orders are being routed and where they 
are being routed and are the routes consistent with the success 
we get with actual executions?
    Those are the missing components that we don't get in a 
real digestible format today that we could really use.
    Mr. Hultgren. Thanks.
    Mr. Rubenstein, if I could address you, I appreciated the 
section of your written testimony discussing cybersecurity. I 
don't know that this qualifies as market structure, but it 
certainly is important to market integrity and to investor 
confidence.
    You recommend establishing a better system for sharing 
information between key stakeholders. I wonder if you could 
please explain the system that is currently in place and what 
specific changes you would recommend, and what role the SEC or 
SROs should or do play in this system.
    Mr. Rubenstein. Thank you, Congressman. Well right now, as 
a member of FINRA, we are frequently audited, and we have to 
abide by the rules that FINRA has. They have a lot of rules 
regarding cybersecurity, that firms have to maintain adequate 
safeguards to prevent hacking and other types of cyber theft.
    But because of the sensitive nature of cyber issues, the 
industry, I feel, has been really hesitant in banding together 
and sharing sensitive information, like when one firm has to 
deal with a cyber issue, they learn something. That information 
needs to be shared with other stakeholders in the industry.
    So that would be my suggestion, is that folks in the 
industry get together, and we actually mandate that they get 
together and have this discussion, so obstacles that are 
encountered can be lessons learned for everybody else.
    Mr. Hultgren. Thanks.
    A couple of you have mentioned in your testimony that the 
SEC should renew its Equity Market Structure Advisory 
Committee. I have generally received positive feedback 
regarding the work of the committee. But as is the theme of the 
hearing today, I wonder if there are opportunities that we can 
find improvement there, as well.
    Mr. Brown, I wonder if I could address the last couple of 
questions to you. Do you believe that EMSAC is the proper 
representation of market participants and policy experts? Do 
you believe EMSAC's work and recommendations are being made use 
of in a constructive fashion?
    Mr. Brown. Well, thank you, Congressman. The EMSAC is a 
valuable tool for the SEC to probe the issues that confront it. 
I will have to say that we were disappointed in the original 
makeup of the EMSAC, because we felt that a firm that served 
retail investors was not included in the makeup of the 
committee.
    As well, we joined with two of the largest exchanges to 
write a letter to the SEC, urging them to make modifications, 
because we felt that that was something that could really add 
to the benefit of the EMSAC.
    So I would hope, as they look at that makeup, coming--as it 
expires in August, and may get reconstituted, they would 
consider that a retail firm and the listing exchanges would be 
included.
    Mr. Hultgren. Thank you all again. I have many more 
questions, but we have got limited time.
    I yield back the balance of my time.
    Chairman Huizenga. The gentleman yields back.
    With that, the chair recognizes the gentleman from 
Massachusetts, Mr. Lynch, for 5 minutes.
    Mr. Lynch. Thank you very much. To begin with, Mr. 
Chairman, I just want to thank you, and congratulate you on 
putting together this hearing with these two panels. This is 
really an all-star group, and I really appreciate your good 
work and the good work of Ranking Member Maloney.
    Mr. Saluzzi, I know that you have been working on a lot of 
issues to democratize the markets, and yourself, and your 
business partner, Sal Arnuk over at Themis. They have been 
doing a great job.
    The essence of a properly functioning market includes a 
pricing mechanism so that when prices fall too far there will 
be new buyers coming into the market, and it re-establishes an 
accurate equilibrium.
    But what you have described in your book--and I actually 
read ``Broken Markets,'' thank you very much, and also to Mr. 
Arnuk, when you put things in, like, the maker-taker 
incentives, the rebates that are going on there, colocation 
that Mr. Lewis described in his book, also payment for order 
flow and special order types, all of that is an encumbrance on 
a properly functioning market.
    Now, last session, I sponsored the Maker-Taker Conflict of 
Interest Reform Act, and I know I sent it over to Mr. Arnuk. I 
am not sure if you got a copy as well. But the legislation 
would require the SEC to carry out a pilot program, such as Mr. 
Lyons has suggested, and I think Mr. Brown has mentioned, to 
create an alternative to the maker-taking pricing model, and 
see what happens.
    Just take a group of stocks and remove the incentives other 
than the best price for the customer. Did you have a chance to 
review that at all, or have any thoughts on that?
    Mr. Saluzzi. Congressman, thank you, and yes, I did. Thank 
you for introducing that bill. I think you were before the 
EMSAC's committee on their proposal. Yours was 2015, I believe. 
So that is exactly what we are talking about.
    However, we are afraid of unnecessary complexity again 
seeping into the market. Some of them on the EMSAC are 
proposing multiple buckets, they call it, in these pilots, 
similar to what we have in the Tick Size Pilot. That is where 
more complexity starts to breed.
    I think we can do something when it comes to rebates and 
maker-taker in a more simpler form, as I mentioned earlier, 
with a flat take-take fee. But you also mentioned a couple of 
other really good points when it comes to order types, 
proprietary data feeds. This whole maze and this whole web that 
we are describing, we referred to it as a Rube Goldberg machine 
years ago.
    The order--here is the buyer and here is the seller. They 
should be really easy to match up. But instead they have to go 
through this crazy mechanism called the United States stock 
market. We can match up buyers and sellers. We need less 
intermediation. And what we have now is more intermediation, 
and we think it is unnecessary.
    Some of these things which causes more intermediation are 
these order types. Let us just take that, for instance, a 
special--for instance, one of the exchanges, a couple of years 
back, was fined $14 million because they did not display, or 
did not disclose certain order types behavior.
    Fourteen million dollars is a significant fine by the SEC 
to a United States stock exchange. The reason being is that 
some clients can take advantage of those order types, while 
others can't. So just to--and I don't want to get into the 
weeds too detailed, but I wanted to read one quote.
    There was something that NASDAQ recently had out, called a 
post-only order. OK. That order is--they changed the way they 
basically designed it. It is supposed to not interact with a 
current hidden order. So you can place a hidden order, you can 
place a displayed order. Why would they do that? Because they 
don't want to incur the access fee.
    So NASDAQ recently changed it and said you know what? 
Actually, we were giving away information on those hidden 
orders because the post-only would slide down when it ran into 
a hidden order. Was that by design or by accident? I don't 
know. But for 7 years that went on.
    Information leakage in the order types through the 
proprietary data feeds was going on. This is what causes 
problems in the United States stock market.
    Mr. Lynch. Right.
    Mr. Saluzzi. These are the issues that are really in-depth.
    Mr. Lynch. All right. Thank you for that explanation. I 
wanted to talk a little bit about dark pools. We recently had a 
case this year, January 2017, where the high frequency trading 
firm Citadel was fined by the SEC about 22 million bucks for 
misleading brokers who sent them retail orders.
    Citadel had promised to give them the best price. Instead 
they referred the trades to dark pools. It turned out they 
weren't getting the best price for their clients. What is the 
best way to introduce some transparency to the dark pool 
situation?
    Mr. Saluzzi. Well, again, that situation was based on two 
sets of data, right? There is one set which is run by the SIP, 
or the Security Information Processor, and then--
    Mr. Lynch. Right. That is the slow feed, right?
    Mr. Saluzzi. That is the slow feed.
    Mr. Lynch. Yes.
    Mr. Saluzzi. And then there is the other fast feed. That is 
the direct feeds that anybody can purchase from an exchange and 
then collect, basically consolidate them all to build a faster 
quote.
    So the Citadel case was basically they were seeing one 
quote and giving the client a fill on an inferior quote. What 
is interesting about that is they pay for that order flow 
again, right, like we talked about before. But if you go back 
to 2004, Citadel actually wrote a comment letter, urging the 
SEC to ban payment for order flow. They said it distorts order 
routing decisions, anti-competitive and creates an obvious 
conflict of interest.
    Mr. Lynch. Right.
    Mr. Saluzzi. Well, what changed in the last 13 years that 
now makes it acceptable?
    Mr. Lynch. Right.
    Mr. Hultgren [presiding]. The gentleman's time has expired.
    Mr. Lynch. I thank the chairman for his courtesy. 
Appreciate that.
    Mr. Hultgren. The gentleman's time has expired.
    Gentlewoman from Missouri--
    Mrs. Wagner. Thank you.
    Mr. Hultgren --Mrs. Wagner is recognized for 5 minutes.
    Mrs. Wagner. Thank you, Mr. Chairman.
    And thank you all for appearing today to discuss issues 
relating to equity market structure and developments that have 
come about over recent years due to technological advancement 
and regulation.
    As many of you all have said, the U.S. equity market is 
indeed the most efficient and the most competitive in the 
world, allowing companies to raise capital to create jobs and 
grow their business. Additionally, improvements in market 
structure have made it easier for what I would call ordinary 
investors to access the market and trade, which is something I 
would like to first start with.
    Mr. Lyons, and also Mr. Brown, in what ways have both 
institutional and retail customers benefited from advancements 
in U.S. equity market structure?
    Mr. Lyons?
    Mr. Lyons. Yes. Thank you, Congresswoman. You know, again, 
as I said before, certainly with Reg NMS, there was a lot of 
friction taken out of the system around access to the markets 
in real time, which was an important point of Reg NMS going 
into it.
    So it allows us, as a buy-side trader representing the 
interests of our 95 million clients, that the regulated funds 
actually have interest in, it allows us more control over the 
order process and allows us to get better outcomes for our 
investors.
    You know, the U.S. equity markets are as liquid as any 
markets or more liquid than any markets we trade in. My vantage 
point, in trading around the globe, in every single market 
around the world, we see really favorable outcomes for our 
investors transacting in the U.S. markets.
    Mrs. Wagner. Mr. Brown?
    Mr. Brown. Yes, I think we have to go back to the context 
of when NMS was created. Remember, at that point, we still had 
a manual market. The New York Stock Exchange operated manually.
    It took minutes to understand where your trade stood--so 
there is no question that retail investors, in the 12 years 
that have elapsed, now have instantaneous access at executions 
between the spread. So there are tremendous advancements there 
that have inured to the benefit of--
    Mrs. Wagner. But to that point, Mr. Brown, the R&D, I 
guess, the increased levels of trading automation and faster 
execution speeds over the last decade, are they attributable to 
Regulation NMS?
    Mr. Brown. I wouldn't necessarily say that they are 
attributable solely to NMS. The technology has improved. The 
use of algorithmic trading has developed, and it has allowed 
for innovative approaches to trading that has really created 
these deep, liquid and best markets in the world.
    Mrs. Wagner. In addition to the innovation and the access 
for the retail investors, have investors benefited, would you 
say, or been harmed by these developments? What would be your 
assessment?
    Mr. Brown. There is no question. I think one of the 
comments earlier was about where we have consensus. I don't 
think anyone would argue that retail investors have it the best 
they have ever had it at this time, and because of the way the 
markets have developed.
    Mrs. Wagner. OK. One of your big concerns has to do with 
this, the market data system that is--
    Mr. Brown. Well, that is--
    Mrs. Wagner --decades and decades old. Would you care to 
expound a little bit?
    Mr. Brown. Yes, now you have touched on a subject where 
there is a concern.
    Mrs. Wagner. That is right.
    Mr. Brown. We have an antiquated structure that governs the 
market data system. We have a securities information process, 
there are really two of them, that produce a slower data feed 
than what is available professionally and through the 
proprietary data feeds from the exchanges. Those are too 
expensive to be able to show our retail clients, and we are 
required, by rule, to purchase the market data from the SIPs.
    Now, it is an interesting dynamic, because it is like 
having a business where the broker-dealers have to give the raw 
materials to a company, by rule, and then by rule we have to 
buy back the finished product. That is a great business if you 
could be in it.
    You have guaranteed profits. But that has to change. It is 
time to modernize our market data system.
    Mrs. Wagner. All right, great. Switching quickly here to 
how equity market structure affects capital formation, can you 
describe how market structure impacts capital formation? Does 
the current structure impede or facilitate capital formation?
    Mr. Brown. Well, that is--again, there is a complex 
subject. The--
    Mrs. Wagner. You have got 7--
    Mr. Brown. Yes. Yes--
    Mrs. Wagner --seconds, Mr. Brown.
    Mr. Brown --it is a very complex subject. I would just 
simply say, the regulatory scheme that overrides corporations 
in making a decision, do I want to become public, is really an 
impediment to the growth of new corporations, new public 
companies.
    Mrs. Wagner. Sadly, my time has lapsed.
    I thank you, Mr. Chairman, and I look forward to submitting 
the rest of my questions in writing. Thank you so much.
    Chairman Huizenga [presiding]. It is the difficulty of the 
format, all in 5 minutes. It is a challenge.
    So with that, the chair recognizes Mr. Foster of Illinois 
for 5 minutes.
    Mr. Foster. Thank you. And thank you, Mr. Chairman, for 
convening this.
    Mr. Brown, you mentioned SIP technology improvements. Is 
there any reason that this should not be pursued really 
aggressively? For example, are the high-frequency trading 
companies (HFTs) unlikely to use the SIP in any case because 
they prefer the proprietary--who would be against a rather 
aggressive improvement in SIP technology?
    Mr. Brown. I think you will hear in the next panel that 
they will say that SIP improvements have been made. But why was 
that? Because the SIPs failed. When the SIPs fail, all trading 
ceases. Well, that is a real problem.
    Now, how long before the SIP fails again? I don't know, but 
the fact is, exchanges and the members of the NMS Plan 
Governing Committee that oversees the SIP are never going to 
make the SIP so good that it would cannibalize the proprietary 
data feeds which they sell.
    I mean, there is a conflict. How would you ever--why would 
you ever do that? So it will always remain a second-tier 
product. Now, it can be improved dramatically. You could add 
depth of book to the public feed. We have to buy it. Why 
wouldn't we be allowed to see multiple levels of data within 
that public feed? I think that is an important improvement.
    The latency has been narrowed, but it could probably be 
narrowed further. So all in all, I would recommend it be 
pursued further. I think your question is right on, sir.
    Mr. Foster. Now, there are two very impressive facts that 
have been quoted here with the Vanguard number of the 30 
percent increase in your value at retirement for your typical 
mutual fund. Is that really a widely accepted--has there has 
been a real improvement from the point of view of the long 
term. So no one would take issue with that.
    The other one is at the other corner, there is the ma and 
pa trader, who have obviously been getting a much better deal. 
That is, at least in part, I understand, affected by the 
payment for order flow.
    Is it a correct understanding of mine that actually ma and 
pa traders get a better deal because people are willing to pay 
for their order flow? Or is there some asterisk on that 
statement?
    Mr. Brown. No. That is pretty accurate, because ma and pa 
trades, trades from retail investors, have an inherent value. 
There is less risk associated with them, because there are not 
100,000 shares--
    Mr. Foster. You know you don't have Jim Simons on the other 
end of it?
    Mr. Brown. Yes.
    Mr. Foster. All right.
    Mr. Brown. Yes. So there is less risk. So a trader will be 
willing to provide a payment for order flow in order to attract 
those types of orders. Now, in so doing, and like the courts 
and the SEC have recognized, a firm that sends order flow in 
return for payment, has an obligation.
    One, you have to make sure that you disclose all the 
payments you are receiving. Second, you have to ensure that you 
obtain best execution. Best execution can be measured by 
execution quality, and that is what we do at Schwab. It is 
really critical for us.
    Our clients, on average, receive a quarter of the spread in 
price improvement, versus if the same size order were sent to 
an exchange, on average, they would get disimprovement. It 
would be traded outside the spread. So we believe there is no 
question that that is best execution, and so do the regulators.
    Now, I think that further disclosure is a good idea. Maybe 
there are ways to make it plain English so clients would 
understand better what is going on. But I think, overall, we 
are fully supportive of that system.
    Mr. Foster. All right. Any other comments from anyone?
    Mr. Saluzzi. If I may?
    Mr. Foster. Mr. Saluzzi.
    Mr. Saluzzi. OK.
    Mr. Foster. Go ahead.
    Mr. Saluzzi. I think that is interesting what Mr. Brown 
says, but all of his orders are being sold to various market 
makers, including limit orders, which I don't understand why a 
non-marketable limit order would be sold to a market maker when 
it could be posted on an exchange, but it is a different point.
    But the Citadel case that we described before shows that 
there are two sets of data. So not every time is mom and pop 
getting the right set of data. In other words, that SIP quote 
that they are looking to buy at the market may not be getting 
the price that they are getting. But that is just one point.
    The second point is retail, we all talk about it, and I 
agree, 100 shares of--you want to buy AT&T? No problem. Put it 
through your retail account you will be fine. But retail also 
represents--if everyone has a pension fund, or a 401(k), or I 
have a 529 for my kids, I have been saving for their college 
for the last 15 years, well, that money is an institutional 
level.
    So that means I am a retail investor being represented by 
an institution, so I don't think we have to just say retail has 
never had it better. How is that the institutions are doing? I 
think Mr. Lyons explained quite a bit of a conflict when it 
comes to order routing and various other things going on in the 
market. Thank you.
    Mr. Lyons. Yes. I would just add one comment, and that is 
the premise that Vanguard has made in regards to their results 
in response to Reg NMS. For the Capital Group, which is who I 
work for, as we have looked at our transaction costs, implicit 
costs, explicit costs have come down certainly, but implicit 
costs haven't really come down as much as people would have 
suggested, from our own data.
    Specifically, when we look at the data, we attribute more 
of the reduction in explicit costs to decimalization, 
certainly, that happened, and also increased electronic access 
to the marketplace, which is a lower price way to access.
    Mr. Foster. All right, thank you.
    And my time is up.
    Chairman Huizenga. The chair recognizes the gentleman from 
Arkansas, Mr. Hill, for 5 minutes.
    Mr. Hill. I thank the chairman. Appreciate this first 
panel, and just makes me always--when we talk about the 
subject, I always feel old, because one of my first jobs in a 
brokerage company in the 1970s was typing confirmations using 
carbon paper. I will explain to the staff what carbon paper is 
after the hearing.
    So we have gone from member-owned cooperative exchanges now 
to for-profit exchanges, and these alternative trading venues. 
I have really enjoyed listening to the discussion. But one 
thing that I think there has been a lot of discussion in 
Congress on, and at the SEC, but no change in the last few 
years, is this issue of governance now of the markets.
    So, Mr. Lyons and Mr. Brown, could you talk a little bit 
about the benefits of having asset managers or broker-dealers, 
people from the brokerage community, serving in the governance 
model overseeing NMS?
    Mr. Lyons. Yes, so I think that having representation of 
the millions of people that we have our best interests aligned 
with is additive to the process. And I think specifically, as 
an example that was just brought up, is the conflict of 
interest in, for instance, the SIP operating committee.
    I think that when you have for-profit exchanges who are 
controlling the pricing mechanism around the SIP, and there is 
no disclosure at all around how those revenues are spent, how 
they are allocated, what the investment in technology is.
    I think that that is a perfect example of having someone 
outside of the SROs, onto these governance plans would add a 
level of transparency that would help along the process and 
maybe inhibit some of the conflicts.
    Mr. Hill and Mr. Brown, when you were talking about market 
data and you talked about modernization, could you go deeper 
and step away from the buzzword, and tell me specifically what 
you mean by modernization? What does that mean to you?
    Mr. Brown. Well, with respect to market data, it would mean 
changes to the feeds that would allow for more information to 
be available to public investors, retail investors. As I 
mentioned, the adding depth of book to the SIP feed would be a 
change.
    This isn't something that is new. We have been advocating 
for this for many years. In fact, I was reading one of the Reg 
NMS adopting releases, and I am quoted in there talking about 
how the market data system needs to be repaired. It shows you 
how long I have been talking about the same things, with little 
effect.
    But what I really would say is that the system, as 
structured--and this really goes back to a structure created in 
the 1970s, it locks us into a certain system. There is no 
innovation.
    The innovation has occurred outside of the SIP. The 
proprietary data feeds are much faster, much more in-depth. 
They are very effective in providing information.
    But if we are going to have a public feed that the industry 
has to purchase, it ought to be maintained at higher levels 
than it is. And that is not the case.
    Mr. Hill I am also interested--we have had a lot of 
conversations since I have been in Congress about exchange-
traded funds (ETFs), and in fact, public policy has, I would 
argue, encouraged people to ETFs as if they are superior to any 
other decision that an individual investor might make about 
asset allocation.
    Clearly, one of the concerns, as Mr. Lyons talked about, is 
the impact on retail investors who invest through a collective 
process.
    Could somebody reflect, talk a little bit, maybe Mr. 
Rubenstein, talk about the impact of these challenges on 
governance and NMS and the impact on the ETF market, exchange 
traded fund market?
    Mr. Rubenstein. Thank you, Congressman. Well, certainly, 
ETFs bring enormous efficiencies to all types of investors, 
both retail and institutional. However, there has been such a 
huge adoption recently of ETFs, and we have seen a tremendous 
rotation from some more actively managed portfolios to 
passively managed portfolios that involve ETFs.
    But there hasn't been a tremendous amount of volatility in 
the market since this rotation has happened. So in some ways, 
the markets are a bit untested, given all of the amount of 
assets that have gone into the ETFs, and it is definitely 
something that we should talk about, to make sure that industry 
participants are prepared for potential volatility in those 
instruments.
    Mr. Hill. Yes, Mr. Chairman, I just think this is really an 
accident waiting to happen with the way we are driving people 
through public policy decisions to ETFs as if it is a sanctuary 
of low risk and unlimited upside. So I yield back. Thank you.
    Chairman Huizenga. Gentleman yields back.
    With that, the chair recognizes Mr. Scott of Georgia for 5 
minutes.
    Mr. Scott. Thank you very much, Mr. Chairman. Our equity 
market structures play such a very pivotal role in our total 
economy. I think it is important to establish that our capital 
markets of the United States is the greatest, in terms of 
competitive advantages to the world. Trust in our markets to 
work effectively is what attracts investments from across the 
world to the United States.
    I want to repeat that. Trust in our markets to work 
effectively is what attracts investments from across the world 
to the United States. This is what makes our Nation No. 1.
    I think that is why this hearing here today is so 
important, to study the evolution of our equity market 
structure and to search out and get recommendations from your 
panelists and this committee--how we can all work together to 
improve it.
    This is indeed a complex subject matter. Everyone basically 
wants a fair, more transparent, open market. But we want this 
because improved markets results in better execution of trades. 
Better execution of trades means better prices, which saves 
money for the everyday people.
    So keeping that in mind, to our American people who may be 
watching this hearing, to those who are saving money for 
retirement or saving for the down payment to buy a house, I 
simply want to ask this panel how Congress should prioritize 
any changes to the market structure?
    I will take--why don't we go down the line? What I am 
asking for here is, it is important for us to keep our Nation 
strong, to keep our Nation's financial system strong, to keep 
us No. 1.
    The fundamental question is, because you all are very 
distinguished, what can you tell us, as Members of Congress, 
that we need to do to keep our Nation strong and having the 
strongest financial economic system on the planet?
    Mr. Lyons?
    Mr. Lyons. Yes, Mr. Scott, thank you. I think that, 
importantly, the Congress can encourage the SEC to continue 
down the road of looking to create opportunities for our system 
to be even better. I do agree that we have the most fairest, 
most efficient, most liquid, most competitive markets in the 
world, and I think it serves our economy and our citizenry very 
well.
    However, as I have explained, there are conflicts of 
interest in the market that we think can be addressed. We would 
really like and hope that Congress can push the SEC to address 
some of those conflicts as we described earlier.
    We also think that the proposals that the SEC has made over 
broker disclosure routing and ATSes are an important component 
for regulated funds like ourselves to monitor and evaluate the 
execution quality we get on behalf of our clients, which lead 
to better investment outcomes, as you suggest.
    Mr. Scott. Yes.
    Mr. Saluzzi. Thank you, Congressman. I can't agree with you 
more that trust and confidence in our markets are the most 
important thing we need. An old friend of ours, Senator 
Kaufman, used to always say, fairness and transparency is the 
key here. I agree.
    What doesn't give me trust and confidence is when I see 
major dark pools, or ATSes getting fined multimillion dollars, 
when I see a stock exchange getting fined millions of dollars 
for various behaviors or certain high frequency trading firms 
also getting fined.
    So I think what is missing here, a critical link, is proper 
surveillance. That goes back to the SEC. In an attempt to fix 
that, they have recommended a consolidated audit trail, which 
is now being built, but it falls short in one key area. It only 
covers the stock and options market. It doesn't cover the 
futures market, because that is the Commodity Futures Trading 
Commission (CFTC). They need to talk to each other.
    Mr. Scott. Absolutely. Something that I am not sure where 
the people watching us this morning is quite aware, but I think 
that I want to bring to the attention of this committee, that 
according to information that I have received, trading at 
traditional national venues like the New York Stock Exchange 
has gone down. That worries me. I see my time is up though.
    Mr. Saluzzi. If I can, a real quick step, prior to NMS, 80 
percent of share was done at the New York Stock Exchange, of 
their listed stocks. Now it is less than 25 because of the 
fragmented maze of liquidity that has been created, mostly due 
to Reg NMS.
    Mr. Scott. Yes. Thank you, sir.
    Chairman Huizenga. The gentleman's time has expired.
    With that, the chair recognizes the gentleman from 
Minnesota, Mr. Emmer, for 5 minutes.
    Mr. Emmer. Thank you, Mr. Chair. I want to thank Chair 
Huizenga, for calling this important hearing, and thank you to 
the witnesses for being here today. I will try not to cover the 
same ground, but I do have some questions that relate to some 
of the things that you have been testifying to this morning.
    First, Mr. Lyons, in your opening statement, I wrote it 
down, you said, ``Our equity markets are fair and the most 
efficient in the world.'' But then you went at the end of your 
testimony and said, ``There are three areas that we really need 
to be concentrating on, the maker-taker, self-regulatory 
reform, the SROs, lack of transparency of broker dealers in the 
ATS.'' It was all about conflicts of interest.
    I think that seemed to be a theme that developed on the 
panel. Mr. Brown, you also talked about that in your opening 
statement.
    I guess the question I would like to open with is for you, 
Mr. Lyons, and I might spread it down the row. Can you give us 
an example, a specific example, of the conflict of interest 
that you are talking about? And any one of the three examples 
that you have given are the three areas, it would be helpful.
    Mr. Lyons. We do a lot of analysis on how our orders are 
exposed to the marketplace. Again, as someone who works for an 
active manager who spends an enormous amount of resources doing 
fundamental analysis trying to uncover hidden value for our 
investors, how we implement those decisions in the marketplace 
are paramount to them receiving the benefits of that work we do 
and to maximize the returns that they can get.
    As we transverse the complex marketplace we have today, it 
is important for us to understand who sees our orders, where 
information leakage might be happening, how ATSes operate in an 
environment.
    When we look at the results of our analysis, we have 
questions for the broker-dealers that we do business with, 
specifically why are we routing to this venue that seems like 
we don't get very much volume into?
    Or I see that my execution quality on one exchange that 
charges a maker-taker fee might be widely different from 
another exchange that charges an inverted maker-taker fee.
    So bringing to bear the reasons that people are routing the 
way they do is an important aspect of what we do, and that is 
why I think disclosure is a good way to get over that potential 
conflict that they have.
    Mr. Emmer. Mr. Brown, do you have anything that you would 
add to that? Any specific examples?
    Mr. Brown. We have heard this morning about payment for 
order flow. Clearly that is a potential conflict and it is one 
that at Schwab we look at very closely, and we then take steps 
to mitigate that conflict.
    For example, our execution partners, we require them to 
charge us or to pay us the same amount per order. We don't want 
to have any incentive to route to one or another based on a 
higher payment. That just doesn't happen.
    And then second, we really monitor our execution qualities 
so that we can be certain that our clients receive best 
execution when they are getting an execution from one of these 
vendors, because otherwise our conflict would be 
insurmountable. But that is not the case.
    For example, in the first two quarters of this year, our 
clients have earned $70 million in price improvement through 
this structure, whereas the payment for order flow is about $7 
million. So you can see--those are just market orders.
    The fact is we really do believe that this is a better 
system. And that payment for order flow is then reinvested back 
into our business to give our clients better trading tools, 
better services, better systems and ultimately, lower 
commissions so that they can trade.
    Mr. Emmer. Just so you know, as we go forward, people like 
me, we are going to need more specific examples because both of 
you have just told me, the way I heard it, how you are self-
policing.
    You are seeing these issues and you try to address them in 
the marketplace. I don't know if that is happening. We need to 
know where and what policy will help drive better results.
    Mr. Saluzzi, very quickly because I have a short amount of 
time, I--and maybe I will send this to you later because I want 
to ask Mr. Rubenstein something about SIP fees versus direct 
fees in the 20 seconds I have left, but you said we should be 
questioning the role of academic study. Maybe you and I can 
connect after and talk about that?
    SIP feeds versus direct feeds, quickly, Mr. Rubenstein?
    Mr. Rubenstein. It is extremely important that we have 
investor confidence. That is why we are all here in this room 
today. Investors use the SIP feed because it is the least 
expensive option. The SIP has improved dramatically in the last 
few years, but there is more work to be done. There are a lot 
of proposals on how we can make it even more accurate.
    Mr. Emmer. And maybe I will--
    Mr. Rubenstein. And I think we should consider that.
    Mr. Emmer. I see my time has expired. Maybe I am going to 
have to followup with you, as well, after.
    Mr. Rubenstein. My pleasure.
    Mr. Emmer. Thank you.
    Chairman Huizenga. The gentleman's time has expired.
    With that, we go to the gentleman from Ohio, Mr. Davidson, 
for 5 minutes.
    Mr. Davidson. Thank you, Mr. Chairman. I would like to 
thank our panel. I really appreciate your written testimony as 
well as the comments you were able to provide, very good 
insights into this situation. One area that I didn't get a lot 
of reference to, I hear a lot of reference to liquidity, 
specifically a lot of reference to liquidity talking about 
high-frequency traders.
    There is this dispersion of exchanges. One of the things, 
and I would like if you could each comment briefly about the 
challenge for liquidity for small-cap firms. Liquidity for 
companies like Apple or AT&T--no problem.
    But companies that are trying to enter publicly traded ways 
to grow, which is part of how our country really built and 
thrived, was helping entrepreneurs scale their companies and 
stay in control of them at some level, versus selling out to 
private equity or just the other parts of the M&A market.
    This path seems to almost be closed. We have added to it 
with lots of regulatory burden, but this dynamic of liquidity, 
if you could comment on.
    Mr. Saluzzi. Thank you, Congressman. I think it is an 
excellent question, and I think it goes to the heart of the 
Tick Size Pilot that has been approved and is currently 
implemented. All stocks are not equal and this is a very 
important point.
    It is not a one-size-fits-all market. So you may have a 
small-cap company that is doing great and they are growing and 
so on, but they don't fall under the radar of a large 
investment manager. So they are trying to get their self known 
and maybe they are looking for analysts to cover them, but 
nobody wants to make a market in that stock anymore because it 
is not profitable.
    So the Tick Size Pilot came out and said how about if we 
widen the tick to a nickel and see if we can encourage real 
liquidity providers to come in to support the name? Now, the 
facts are still not known in the Tick Size Pilot. As much as 
the industry wants to say it is a failure, I don't believe that 
is true.
    I think it is starting to work, but what is happening is 
you have to change behavior amongst traders like myself, which 
we have adopted to it very easily, but there are a lot of 
broker algorithms, because most people--I am a dinosaur in a 
sense that we are still trading. I am still a human covering 
accounts. When I am not here, I am hitting keys at my desk. I 
am a practitioner.
    But what happens is, there are a lot of algorithms out 
there and they haven't figured out that you can go in there for 
more size. There may be more liquidity. Instead, what they do, 
the average trade size in the United States, which trades 6 
billion to 7 billion shares a day, is 200 shares. That is lit 
or dark.
    So that is a very small amount. What needs to happen is 
behavior will change, and I think it will and it will prove 
that the Tick Size Pilot could help those small-cap companies.
    Mr. Davidson. Thank you, Mr. Saluzzi.
    Mr. Rubenstein?
    Mr. Rubenstein. Thank you, Congressman. I am glad you 
brought this subject up because the number of initial public 
offerings (IPOs) has gone down tremendously in this country 
over the last 10 years and 20 years. Certainly increasing the 
amount of liquidity for small and mid-cap companies would help, 
and it will be interesting to see the results of the Tick 
Pilot.
    But when we are also--there was a theme in this room 
talking about the maker-taker pricing schedule and we are all 
for taking and looking at the data-driven approach to see how 
we can make our markets more efficient.
    But the fact of the matter is, if you remove rebates from 
the market, you will remove liquidity for small and mid-cap 
companies. You will remove lit liquidity in the markets. So if 
we start attacking the maker-taker pricing schedule, it will 
run contra to the Tick Pilot Program.
    The other thing that we have to keep in mind if we are 
trying to increase liquidity in small and mid-cap names, is 
making sure the closing auction remains centralized at the 
primary exchanges.
    There is talk now of fracturing that close. Public 
companies have spoken out and they have said that--especially 
small and mid-cap companies--that they want their close 
effected by the primary listed venue. We should pay attention 
to them.
    Mr. Davidson. Thank you. I would like to change topics. I 
apologize for cutting off, but time runs fast on this thing. So 
a lot of talk on this consolidated audit trail, Mr. Saluzzi 
probably most acutely, but one of the things that strikes me is 
these exchanges are selling data.
    They have the data. There is a whole commodity market for 
it, effectively. Isn't this the exact same data that we are 
trying to get from the consolidated audit trail?
    Mr. Brown?
    Mr. Brown. Yes, Congressman, you are absolutely right. That 
is one of the troubling things about not having broker-dealer 
participation in an NMS plan developing the consolidated audit 
trail is that what is going to be the use of that information 
once it resides within the exchanges?
    It is for regulatory purposes but will it also be used for 
business purposes? We have no confidence whatsoever that that 
isn't the case, and we won't know until this rolls out. So it 
is a real concern.
    Mr. Davidson. I thank you all. My time is nearly expired. I 
really look forward to digging deeper into the topics.
    Mr. Chairman, I yield back.
    Chairman Huizenga. The gentleman yields back.
    With that, the chair recognizes Mr. Hollingsworth of 
Indiana for 5 minutes.
    Mr. Hollingsworth. Good morning. Thank you, Mr. Chairman 
and thank the distinguished panelists for being here this 
morning. I have really enjoyed and appreciate the dialog.
    I wanted to ask Mr. Brown a question, something that you 
said earlier I wanted to come back to. You had mentioned that 
in routing to an exchange, all too frequently the quality of 
execution declines dramatically as opposed to maybe other 
methods by which you would fulfill that order.
    I think you mentioned specifically being outside the spread 
when on occasion you can make up some of the spread by routing 
it differently. Tell me a little bit about that and why there 
is such a discrepancy between quality of execution?
    Mr. Brown. Well, the whole execution structure that has 
developed, really since Reg NMS, is one that is recognizing 
that the less risk of a retail order.
    Mr. Hollingsworth. Yes.
    Mr. Brown. And so firms compete aggressively to attract 
those orders in order to trade against them and then they can 
make some profit. The client gets a tremendous execution--
    Mr. Hollingsworth. Right.
    Mr. Brown --over a quarter of the spread, on average, and 
we get a payment for order flow. If you turn that value, you 
could eliminate payment for order flow, and we wouldn't change 
our routing practices because they still are going to be 
competing and trying to utilize the inherent value in a retail 
order.
    If you send it to an exchange, who sits at the bid offer in 
exchange? Professional traders. They are going to benefit, or 
they are going to--the exchanges don't want to compete by 
driving to a better price.
    They would rather be able to keep their bid offer and allow 
the retail customer to really pay more, transfer wealth from 
retail investors to the professional.
    Mr. Hollingsworth. Right.
    Mr. Brown. That just doesn't make sense in our view.
    Mr. Hollingsworth. Right, and how have you, maybe over the 
course of your career, but maybe even more recently in the last 
decade, how has the delta in execution quality between 
exchanges and other order routing or order fulfillment, tell me 
how has that changed over time? Has it gotten narrower or has 
it gotten larger or has it stayed roughly the same? And if so, 
what is driving that in either direction?
    Mr. Brown. Well, I would argue that it is widening.
    Mr. Hollingsworth. OK.
    Mr. Brown. And it is because the internalizers, so to 
speak, who are our execution partners, are competing 
aggressively to attract flow. And it is a--
    Mr. Hollingsworth. And what is keeping the exchanges from 
trying to compete with them today?
    Mr. Brown. Well, they have come up with ideas. They--
    Mr. Hollingsworth. Yes.
    Mr. Brown. There was an idea in the New York Stock Exchange 
to have a midpoint execution. And yet when you seek it out it 
may not be there, and then it is too late. You are going to 
trade on the bid or offer.
    So there should be competitive reactions by the exchanges--
    Mr. Hollingsworth. Right.
    Mr. Brown --rather than an example of something like trade-
at--
    Mr. Hollingsworth. Yes.
    Mr. Brown --which trade-at is a watch word for let's force 
by regulation order flow back to the exchanges.
    Mr. Hollingsworth. Yes.
    Mr. Brown. Let's use regulation rather than competing on 
price. Let's use regulation to compete. We really take 
exception to that.
    Mr. Hollingsworth. Well, I know you have talked a lot about 
data and some of the proprietary fees that come from the 
exchanges and some of the concerns that I think have been 
expressed by everybody about--how do I want the control that 
they have over that.
    Would you say that the lack of narrowing in execution 
quality is reflective of the lack of competition that exchanges 
are being pressured with as opposed to the other order routing 
methods?
    Mr. Brown. Well, certainly there is a pressure on them, 
because, as Mr. Saluzzi mentioned, the New York Stock Exchange 
volume went from 80 percent of their listed securities into the 
mid-20s. So they want to do something to drive that back, and 
if they can't do it by competing on price--
    Mr. Hollingsworth. Yes.
    Mr. Brown --they will do it through regulation.
    Mr. Hollingsworth. Right. Fair enough.
    Mr. Rubenstein, you had talked a little bit earlier, and I 
know previous Congressmen touched on this, but just to come 
back to it, what do you hear from large public companies, from 
investors or from pre-IPO companies about their specific 
concerns with regard to market structure and how that might 
impact the liquidity in their trading, in their stock? How it 
might impact their IPO?
    Can you tell me a little bit--we talked a lot about the 
decline in IPOs, the decline in the number of public companies. 
There are a lot of reasons for that, many of which are 
discussed in this committee. But what specifically about market 
structure concerns people?
    Mr. Rubenstein. Well, I think there are three items. Thank 
you, Congressman. The first is they certainly recognize how 
innovative technologies have made the markets more efficient. 
They made them more fair, more transparent.
    Mr. Hollingsworth. Right.
    Mr. Rubenstein. We are saving investors money when they 
trade, as we have heard. This is a big theme today.
    Mr. Hollingsworth. Sure.
    Mr. Rubenstein. They are also interested in understanding 
the markets better and we are happy to use some of the 
quantitative tools that we use to build our trading algorithms 
and help them understand the markets with those tools.
    Mr. Hollingsworth. Right.
    Mr. Rubenstein. And the third thing is--one thing that has 
come back is by far the most important thing to them is--that 
their closing auction, as I mentioned briefly earlier, is 
conducted by their primary listed--
    Mr. Hollingsworth. Yes.
    Mr. Rubenstein --venue. It is the most important trade of 
the day.
    Mr. Hollingsworth. Right.
    Mr. Rubenstein. It is the trade that mututual funds, hedge 
fund portfolios are marked to, that everyone's retirement 
accounts are marked to, derivatives transactions are marked to, 
and they don't want to see it fractured--
    Mr. Hollingsworth. Yes.
    Mr. Rubenstein --amongst Wall Street firms. Thank you.
    Mr. Hollingsworth. Understood. Thank you so much.
    I yield back.
    Chairman Huizenga. The gentleman yields back.
    With that, the chair recognizes the gentleman from Maine, 
Mr. Poliquin, for 5 minutes.
    Mr. Poliquin. Thank you, Mr. Chairman, very much. I would 
like to yield 20 seconds to my associate, French Hill from 
Arkansas.
    Mr. Hill. It is summer and everybody here, it is a good 
crowd, Bruce, everybody wants to go to Maine. We have Maine 
travel brochures here. The small blueberries, the lobsters, 
this will just save time because this will let Bruce have more 
time to ask his questions. I yield back.
    Mr. Poliquin. Thank you. I reclaim my time. Thank you very 
much, Mr. Hill. I am a huge advocate for the State of Maine. I 
know all you folks here who have not booked your Maine 
vacation, remind you that there still is time. We do not use 
the air conditioning in the State of Maine. We don't need it 
and we do have plenty of--
    Chairman Huizenga. The chair is tempted to dock you 30 
seconds for the advertisement, but--
    Mr. Poliquin. Prefer that you add that 30 seconds back on, 
Mr. Chairman, but if you don't, I will understand. Thank you 
very much. I appreciate all you folks being here today. I 
represent rural Maine, not the urban areas that we have.
    We are very proud of our hardworking families and we have 
thousands and thousands of small businesses in the State of 
Maine and folks that are trying to save for their retirement 
and also for their kids' college education.
    Now, there is roughly $24 trillion in our economy here in 
the states of our retirement savings and a lot of you folks 
here are responsible or, in part, play in that space.
    Mr. Lyons, one of the concerns I have for those folks that 
work in this space, that help our families in Maine and 
throughout the country save for their retirement, is to make 
sure that when a trade is executed on behalf of your clients 
through some of these other folks in the space, that the retail 
investor gets the best price at the lowest cost such that the 
rate of return will be the greatest, such that they have the 
biggest nest egg humanly possible so they can enjoy their 
golden years.
    Now, could you do me a favor, sir? Could you walk us 
through a large institutional trade that would be conducted on 
behalf of one of your funds? What does that look like, and 
maybe point out some of the problems, if there are any, that 
you run into in that process?
    Mr. Lyons. Thank you, Congressman Poliquin. As a matter of 
fact, the Capital Group has, as part of their investors, over 
30,000 individuals from your district, representing over $1.5 
billion in assets--
    Mr. Poliquin. Thank you.
    Mr. Lyons --so it is pertinent to you.
    Mr. Poliquin. Thank you.
    Mr. Lyons. For us to navigate, we are a large active 
manager, we do fundamental analysis, our order sizes are quite 
large relative to the available market share. For instance, in 
the U.S. our average order is about 65 percent to 75 percent of 
the average daily volume.
    So for us to be able to maximize the returns that our 
investors receive from that decision to invest in that 
position, we need to implement that in a way that minimizes 
information leakage, certainly, because as word gets out that a 
large institution is investing in the marketplace the price 
starts to move.
    People start to freeride against that information. So it is 
our concern to make sure that that information leakage is 
minimized.
    Mr. Poliquin. As a result, sir, might you break apart a 
large institutional order into smaller pieces and execute the 
trade that way? How could that help your clients?
    Mr. Lyons. Yes, we do. The basic strategy we take depends 
on the investment thesis, certainly. But in general, to 
minimize market impact, we will look to passively interact with 
the marketplace so that we can effectively avail ourselves to 
the liquidity that is available at that time.
    In the same period, we look for large block liquidities, 
too, other large participants in the market that we can 
negotiate a large block on behalf, because that is typically 
the best outcome for us.
    Mr. Poliquin. Is this split--
    Mr. Lyons. Yes, but splitting the market and splitting the 
order into--doling it out into the marketplace, we use advanced 
technologies to do that. We are connected to multiple liquidity 
pools, and we use that technology and the expertise of our 
traders to be able to do that effectively.
    Mr. Poliquin. Is this challenge that you have, to make sure 
you get best price at the lowest cost, a function of your size 
or is there anything that you would recommend to this panel, to 
Congress, to the SEC, that would be an adjustment to the equity 
market structure that would help facilitate that such that our 
folks in Maine receive the benefit of the best performance they 
can for the return?
    Mr. Lyons. Yes, thank you. I specifically think that 
looking at reducing conflicts of interest, specifically around 
the maker-taker pricing scheme--
    Mr. Poliquin. Give us an example of that.
    Mr. Lyons. For instance, we are talking about why people 
interact at different markets and why maybe the exchanges have 
inferior execution. As broker-dealers implement investment 
decisions that I may have, part of what they try to do is 
control the economics around it, control their cost of 
executing that on my behalf. That maximizes their profit.
    In doing so, they try to utilize non-exchanges, non-
displayed liquidity to sort of minimize those costs associated 
with the exchange. This really effectively diminishes the 
amount of order that interact in a lit market and really can 
have a detrimental impact on the price formation mechanism.
    So really, we look to see if there are ways to increase 
order flow into the lit market so that we can have robust price 
discovery mechanisms. I think that that is sort of the focus. 
It was really what we think can happen with all the suggestions 
we have made over the written testimony and oral testimony.
    Mr. Poliquin. Thank you very much, sir. I yield back my 
time.
    Mr. Saluzzi. Congressman, could I get one of those 
brochures? We are planning a vacation.
    Chairman Huizenga. Now, the chair will remind you the Pure 
Michigan campaign is in full swing as well, so--
    Mrs. Wagner. Go Cardinals.
    Chairman Huizenga. Anybody else care to risk being gaveled 
down? OK.
    With that, the chair would like to recognize Mr. Budd from 
North Carolina for 5 minutes.
    Mr. Budd. Thank you, Mr. Chairman. At the risk of the 
gavel, the mountains of North Carolina are great this time of 
year.
    Mr. Lyons, so it is a general theme we talk about. Most of 
the testimony that the markets of the United States that we are 
very efficient, well capitalized and high functioning compared 
to any in the world.
    And we talk about the results but the results being lit 
transparency, liquidity, trust, confidence, efficiency and 
fairness are just some of the things that I have heard 
mentioned. But what are some of the features that have led to 
that, that make us unique versus other international equity 
markets?
    How do we ensure that we preserve those as we look at these 
equity markets and as we move forward? How do we make sure that 
we preserve those things that have led us to that position?
    Mr. Lyons. Well, that is a big question--
    Mr. Budd. Sure.
    Mr. Lyons --and probably one that I am not adequately 
prepared to know all the answers, that is for sure.
    But I do think that any ways that we can impede frictions 
in the marketplace to allow natural buyers and sellers to 
interact with each other to try to limit the amount of 
unnecessary intermediation that exists in the marketplace, I 
think, will benefit our markets.
    I think it will lead to more trust. I think it will allow 
investors to take advantage of the investment managers they 
entrust their savings to. So I really think that focusing on 
the issues that we have talked about will lead to that.
    I would say as an aside in speaking about the one-size-
fits-all that Joe talked about, certainly, there is a need for 
market makers to be in the market providing liquidity. And the 
maker-taker pricing scheme probably helps that. But really, 
market makers should survive on the spread.
    And so if there are inefficiencies in the market between a 
small-cap stock or a large-cap stock, that should be embedded 
in the spread that market makers are willing to participate in, 
and I think that that would be more beneficial than having to 
entice them to be there to create artificial spreads.
    Mr. Budd. Mr. Brown, did you care to weigh in on that?
    The microphone?
    Mr. Brown. Around the globe--one of things that I have 
mentioned is that the United States has the highest percentage 
of retail investors in the world. To me, that is a critical 
element, having people trust our markets so that they can--as 
the other panelists have mentioned that this is their 
retirement savings.
    Trading is not a game. It is a tool for people to save 
their money, to save up for retirement or save up for a house, 
whatever it is.
    So I think we have to remain focused that as individual 
investors seek higher returns in this low volatility 
environment there are risks that they may want to take. A firm 
like ours, we want to be able to work with our clients, offer 
them information so they can make better judgments about what 
it is they ought to do with their money.
    So I would not want us to take steps that would disincent 
individual investors from being in our marketplace.
    Mr. Budd. Sure. Thank you.
    Mr. Rubenstein, again, thank you for coming--each of you. 
You mentioned earlier that you have been on the trading floor 
for a long time, 20 years ago, and I happened to see the modern 
version of it just last week being on the floor and seeing your 
company at work.
    But we talk a lot about how this may have hurt the retail 
investor or even the institutional investor, some of this 
technology. But what in the past were some practices that were 
going on that had stopped as a result of technology that have 
put us in a better position today?
    Mr. Rubenstein. Thank you, Congressman. Well, just like it 
is so easy to shop online using technology and get around using 
different apps on our phone that can quickly tell you what the 
traffic patterns are, technology and computing power is just 
going to really increase efficiency and accuracy.
    So on the floor of the exchange as a market maker, we would 
have to--using our eyes and you had to just assess what the 
best price was, looking at what is happening in the options 
market, for example, or watching what was happening on the 
commodity in the commodities pits on the floor.
    But now, because of computers, so much more information can 
be analyzed. Other firms can compete using that same 
information. And what that means is you have got all these 
market makers competing with very sophisticated technology and 
what happens is the investors got a very tight spread and saves 
money every time they trade.
    Mr. Budd. Thank you. Just in the remaining few seconds, do 
you see on the horizon--any of you--blockchain technology as a 
disruptive force in equity trading? I don't know if that is 
even on your radar in the future for settlements. Not at this 
time? All right.
    Thank you. I yield back.
    Chairman Huizenga. The gentleman yields back. With that, 
the gentleman from New Jersey, Mr. MacArthur, is recognized for 
5 minutes.
    Mr. MacArthur. Thank you, Mr. Chairman. It is an 
interesting time, I think, to revisit Reg NMS and see how it 
has functioned over the last decade and where we might need to 
make changes.
    When I think about how that came about and I think about 
the regulatory regime in the 1970s that sort of gave rise to 
all of this national market system, it seems to me there are a 
couple of areas that were intended to--and they still are 
intended to define the market: efficiency, fairness, 
availability of information, access for people, however they 
want to access the market, optimal execution.
    I want to focus on the fairness issue for a moment. Mr. 
Brown, both you and Mr. Lyons have touched on this a little 
bit, how different market participants interact with one 
another and whether things have become unbalanced.
    And I could take this in a number of different directions. 
The maker-taker fee system has come up a few times. It reminds 
me of--I came up in the insurance industry, and we had issues 
back in the 1990s where brokers were driving business in ways 
that seemed to have more to do with their own profitability 
than their client's needs.
    It creates a lot of unsettledness among participants. And I 
think that may happen in this area as well. But my question is 
back to the SROs.
    Mr. Brown, I will start with you. You specifically 
mentioned earlier that you are concerned that there are 
conflicts of interest and that as the SROs have become for-
profit enterprises and have expanded their business, done all 
the things that they should do as for-profit businesses, they 
are now in competition with other market participants. And that 
conflict has remained unchecked thus far.
    So I would like you to unpack that a little bit. What are 
some of the areas of conflict? What should happen to alleviate 
that? Who should act here? Should it be Congress? Should it be 
the marketthe whole industry? How do we fix some of these areas 
so there is not this doubt in the marketplace about why 
companies do what they do?
    Mr. Brown. You are absolutely right, sir, that exchanges as 
for-profit corporations have a duty to make money for their 
shareholders. That is their fiduciary duty, and they need to do 
that. But they operate under this mantle of self-regulatory 
regulatory organization.
    And that is a government-granted status that says they have 
the right to regulate their participants, the people who use 
their system. Yet when they compete with those members for 
routing of orders or other things, they then are both regulator 
and competitor.
    And that is a conflict that is very difficult to mitigate.
    Mr. MacArthur. So who should fix that?
    Mr. Brown. Well, I would urge Congress to look into this 
issue, and to say is it still a part of our national market 
system, a fundamental ingredient that we have self-regulatory 
organizations that are actual businesses?
    We have a self-regulator, FINRA. FINRA is a true regulator. 
They could absorb the regulatory function and Congress could 
delegate to them to absorb the regulatory function, and turn 
exchanges free from being SROs. They could be, yes, and to be 
commercial enterprises as they are.
    Mr. MacArthur. Do any of you see value in the exchanges 
being SROs? And not as has been proposed using someone else 
like FINRA to do that?
    Mr. Saluzzi. Congressman, if I may, I think exchanges enjoy 
a number of benefits from being an SRO, one of them being 
immunity as well. They do have some sort of immunity when it 
comes to regulatory issues.
    If there is a trade error or, as is in the Facebook case, 
the Facebook IPO, there was a problem, and that is a nice 
benefit to have, yet they still are in the for-profit business.
    So I think to square those two up is a bit of a challenge 
and maybe that does need to be separated there.
    Mr. MacArthur. OK.
    Mr. Lyons. I would only add that there certainly is an 
important function that SROs perform and exchanges perform in 
terms of monitoring and surveilling what is going on in the 
market to detect manipulative or bad practices. So I think they 
serve a role working in that capacity.
    To answer your question about what should be done, I really 
think the SEC needs to take a leading role in this and advocate 
for additional participants, non-SROs, to be part of the NMS 
governance package.
    Mr. MacArthur. I am sorry, my time is up. Perhaps you could 
respond in writing afterwards, if you would, or somebody else 
may have the same question.
    I will leave you with this. New Jersey and you, perfect 
together.
    And a lot closer than Maine. Thank you.
    Chairman Huizenga. I am definitely gaveling this closed 
now. OK. Well, we are going to be moving into our next panel 
here shortly. I am going to be recessing for 2 minutes, and I 
mean 2 minutes. But I do want to thank our distinguished panel 
for your time and your effort in being here today.
    It is deeply appreciated. I know that these conversations 
will continue, and again, I just want to say thank you for your 
expertise and your insight. So with that, the committee is 
recessed for 2 minutes.
    [Recess.]
    Chairman Huizenga. The committee will reconvene, and I 
would like to say thank you to our second panel for your 
patience in being here but we also think that might have been 
valuable to have heard from some of the participants. I think 
that was a goal and objective of mine was to get some of those 
views out of folks who had been using the system and using the 
markets and are engaged in that on a daily basis.
    And we now have the privilege of hearing directly from 
those of you representing the markets. Real quickly, again, we 
will run over our panel.
    The second panel here is Tom Farley, President of the New 
York Stock Exchange. We have got Brad Katsuyama, CEO of 
Investors Exchange, IEX; Chris Concannon, who is President and 
Chief Operating Officer of the Chicago Board of Options and 
Exchange; John Comerford, Head of Global Trading Research at 
Instinet; and Tom Wittman, Executive Vice President and Global 
Head of Equities for NASDAQ.
    I really appreciate each of you being here today, and I 
think we are going to dispense with the opening statements from 
us on this panel and move right into the opening statements 
from all of you.
    So with that, Mr. Farley, you are recognized for 5 minutes.

                   STATEMENT OF THOMAS FARLEY

    Mr. Farley. Good morning. Thank you so much, Chairman 
Huizenga, Ranking Member Maloney, all the members of the 
subcommittee. As the chairman said, I am Tom. I am the 
President of the New York Stock Exchange.
    I have submitted written testimony so I wasn't going to 
just read verbatim the testimony and rather I was going to 
provide a few thoughts on the history of markets and how it 
relates to the subject matter today.
    Chairman Huizenga. That would be fine, and I should remind 
the panel that each of you have put in a written testimony, 
which will be submitted for the record.
    So with that?
    Mr. Farley. We celebrated a big birthday last month, the 
225th birthday of the New York Stock Exchange. If you go back 
to the origin, the stock exchange was founded right at the 
corner of Wall Street and Broad Street in New York. And that 
was actually where the country was born, essentially.
    George Washington was sworn in there. The first Congress of 
the United States was right at Wall and Broad. The Bill of 
Rights was ratified, so on and so forth. And in those days, 
entrepreneurs, Alexander Hamilton was one of the first 
actually, he founded Bank of New York, they would show up on 
the corner and they would pitch their ideas and there were 
prospective investors there.
    And the prospective investors would hear is this a good 
idea, is this not a good idea and they would allocate capital 
judiciously. In order to entice that capital allocation they 
started trading the securities day after day because the 
investors wanted to know if I give you money, Alexander, and I 
change my mind in the future, how do I know I can get it back?
    So the act of raising that capital is really the primary 
function of an exchange and that everyday trading is the 
secondary function of an exchange. That is what we think of as 
the stock market.
    If you fast forward 225 years, that is exactly what we do 
today. Our mission has not changed. It has not wavered. We help 
great men and women raise capital to go turn their dreams into 
reality and go make life better for Americans and global 
citizens.
    And as a necessary byproduct of that, we also operate very 
efficient secondary markets for trading of those securities. 
And that is kind of how it works.
    Even in those earliest days, traders would show up at the 
corner of Wall and Broad and they would say publicly this is 
where I am willing to buy this particular stock. This is where 
I am willing to sell this particular stock. And that was 
displayed liquidity, and that was the lifeblood of this 
secondary market. And again, nothing has changed.
    The New York Stock Exchange, just by way of background, has 
flourished during that time, I can say with all due humility, 
because I had nothing to do with the first two centuries, as 
you might imagine. But we are the largest exchange in the 
world, $30 trillion in market cap, round about 40 percent of 
all market cap in the world is listed with us.
    So I come into this meeting with very much a bias and 
perspective of the listed companies. And from the listed 
companies' perspective something is wrong. If you look, the 
number of companies is down by almost half over the last 20 
years.
    IPOs have declined dramatically. The 10-year period 
starting in 1991--the lowest numbers of IPOs in a given year in 
the U.S. was 350. In the current 10-year period that we are in, 
the highest number of IPOs is 290. So you are seeing fewer and 
fewer companies going public, which is not a good thing for 
society.
    That is fewer investment choices, fewer companies that the 
retail public can take advantage of value creation.
    And so the question is why? Well, the market is actually 
working pretty well for big companies because the aggregate 
market cap is growing. So the number of companies is shrinking 
but aggregate market cap is growing, which means the average 
company is much bigger.
    The Bank of Americas, the JPMorgans, in your district, 
Congresswoman Maloney, they can afford to deal with the 
challenges of being public. But the small to mid-sized 
businesses can't. They are swamped. The pendulum has swung too 
far. In fact, the pendulum is kind of beating them about the 
head.
    They are having to deal with the litigation environment in 
this country. They are having to deal with regulatory creep, 
and I think the ever-expanding scope of Sarbanes-Oxley is a 
good example of that. They are having to deal with new 
regulations that have come about largely from Dodd-Frank that 
reflect a social agenda untethered from whether the disclosures 
required are actually material to investors.
    I mean, this is a very difficult environment. One thing 
that really drives our listed companies a little bit bonkers is 
dealing with these proxy advisory firms, which are so powerful 
and opaque and have a lot of importance, but not 
accountability.
    So we think we need to focus first on that primary part of 
the market. I know today is mostly about the secondary function 
and trading of securities, but I felt like I had to make that 
important point because that is driving so much of what 
concerns us in the stock markets today.
    Just briefly on the secondary point, on the secondary 
market, in other words, on the stock market, we will talk a lot 
about it. I look forward to the Q&A. I will come at it from a 
perspective, again, of the listed company. They look at the 
markets and they say, wow, this has gotten very fragmented.
    For the small and mid-sized companies our spreads have 
widened. For the big companies, again, it is working. It is 
working well. But small to mid-sized companies there is a real 
problem and the listed companies are asking us, and in turn I 
am asking you and our regulators focus on simplicity, focus on 
transparency. That is what the listed companies are looking 
for. Thank you.
    [The prepared statement of Mr. Farley can be found on page 
91 of the Appendix.]
    Chairman Huizenga. Thank you, appreciate that.
    Mr. Katsuyama, 5 minutes.

                   STATEMENT OF BRAD KATSUYAMA

    Mr. Katsuyama. Thank you. Chairman Huizenga, Ranking Member 
Maloney, and members of the subcommittee, thanks for the 
opportunity to offer this testimony. I appreciate your 
willingness to provide a forum to consider ways to strengthen 
the U.S. equity markets.
    My name is Brad Katsuyama. I am the co-founder and CEO of 
IEX Group. We are the newest national stock exchange, and as an 
exchange we continue to innovate and prioritize the interests 
of investors. And pending regulatory approval from the SEC, we 
will compete for corporate listings later this year.
    The U.S. equity markets are a critical national asset. 
Capital formation is key to economic growth, and today we must 
ask do the markets serve the interests of investors, companies, 
and capital formation, or do they serve themselves?
    All market structure changes should be evaluated through 
this lens, and if the equity markets are not evolving in a way 
that best serves these constituents, actions should be taken.
    When we say the word investor, many people instinctively 
think of mom and pop with a retail brokerage; however, mutual 
funds, pension funds, and institutions manage 63 percent of 
U.S. equity holdings, which reflects the savings and 
retirements of everyday Americans.
    This distinction is important because today's market has 
been optimized for trading in small size with little 
consideration for the needs of large institutional investors.
    Many of the public companies we have met with over the past 
couple of years are frustrated with the opacity and complexity 
of the current markets as they realize the exchanges they rely 
on for market support have significant conflicts of interest 
and their confidence and trust in the market is undermined.
    Technology drove the majority of improvements in the equity 
markets over the past two decades. Efficiencies such as 
increased automation, lower costs and faster speed, but if you 
consider the advances in technology brought to the public in 
other industries in the equity markets, exchanges and certain 
traders have largely hoarded these technology benefits at the 
expense of investors.
    The proper role of an exchange is to act as a neutral 
referee, providing the most accurate price to both sides of the 
trade. And unfortunately, exchanges fail in this role by 
selling a faster view of market data to high-speed traders than 
the exchange itself relies on to price trades on its own 
market.
    In essence, they have sold high-speed firms the ability to 
trade while the referee looks the other way.
    A critical turning point for U.S. equity markets occurred 
when the national stock exchanges made the conscious decision 
to sell high-speed data and technology instead of allowing 
third-party vendors to compete at selling these products in the 
open market.
    This decision by exchanges conflict with their role as 
self-regulatory organizations responsible for maintaining fair 
and orderly markets. Exchanges purposely selling multiple 
versions of the same stock market based on tiers of access, 
data and technology benefit only the fastest high-speed traders 
at the expense of all others, which is anything but fair or 
orderly.
    Exchanges deciding to sell data and technology also enabled 
monopoly power. Clearly there is no substitute for New York 
Stock Exchange market data being sold by NYSE inside of the 
NYSE datacenter. No other entity can provide this level of 
access and all of the major exchanges abuse this monopoly.
    A broker recently cited their NYSE market data costs to 
receive market data increased by 700 percent since 2008, a 
shocking figure when you consider rapidly declining technology 
costs in other industries. IEX can say from our own experience 
that what exchanges charge for data and access bears no 
rational relationship to what it costs to produce it.
    The greatest irony is that investors and brokers create 
market data when they send orders and trade. The exchanges 
aggregates this information and sells it back to the industry.
    So exchanges just effectively deliver the news. They don't 
make the news. They don't write the stories, but the governance 
committee that oversees market data is operated by the 
exchanges with no broker or investor representation, and this 
should change.
    Finally, the most harmful but easily addressed conflict is 
the practice of exchanges paying $2.5 billion a year in rebates 
to brokers to send them orders. Exchanges reap profits by 
selling those orders back to the industry in the form of market 
data, and this practice also creates a conflict of interest as 
brokers keep the vast majority of rebates that exchanges pay 
them, even when routing client orders.
    In fact, two former SEC chief economists stated that, ``In 
other context, these payments would be recognized as illegal 
kickbacks.'' Publicly available data showed that exchanges who 
pay the highest rebates per share for providing liquidity, 
provide on average worse execution quality.
    But despite these downsides, the large rebate exchanges 
have the largest market share and the longest lines to trade, 
which is alarming. Would a reasonable person ever wait on the 
longest line for a worse outcome?
    The answer is no, but in the equity markets that is 
happening millions of times a day, every day, as brokers are 
paid to get in the longest line despite what is in the best 
interests of their clients.
    We face a unique bipartisan opportunity to deregulate the 
stock market for the benefit of investors and companies. Many 
of the complex regulations in place today were originally 
designed to protect investors but over time they resemble Band-
aid solutions to manage a market plagued by conflicts of 
interest.
    Parts of Reg NMS can be relaxed or removed if rebates were 
eliminated. Brokers would be free to focus on providing clients 
with the best execution quality. Exchanges would compete 
without the conflict of paying $2.5 billion per year in 
rebates.
    As a result, market data, technology costs would decrease 
to competitive levels, delivering value back to brokers, 
traders, and investors without the need for further government 
price controls. All of this is possible by eliminating rebates 
and aligning the interests of the exchanges, brokers, 
investors, and companies.
    We have the largest most important stock market in the 
world, a pillar of American capitalism but nothing about a 
healthy market and competitive market should require artificial 
incentives for people to trade.
    I look forward to the opportunity to discussing this 
further. Thank you.
    [The prepared statement of Mr. Katsuyama can be found on 
page 97 of the Appendix.]
    Chairman Huizenga. The gentleman's time has expired.
    With that, Mr. Concannon, you have 5 minutes.

                  STATEMENT OF CHRIS CONCANNON

    Mr. Concannon. Mr. Chairman and members of the 
subcommittee, I am Chris Concannon, President and Chief 
Operating Officer of the CBOE Holdings. I would like to thank 
the subcommittee for inviting me to testify today. I also 
commend this subcommittee for its ongoing review of complex 
critical issues that exist within the U.S. equity markets, 
including issues like Regulation NMS.
    CBOE is one of the world's largest exchange holding 
companies. We offer the industry's widest array of products, 
including options, futures, equities, ETFs, FX, and proprietary 
index products, such as S&P 500 options and futures and options 
on the CBOE volatility index, or VIX.
    In 1975, Congress amended the Securities and Exchange Act 
of 1934 to facilitate the establishment of a national market 
system to link together the multiple exchanges. Congress 
intended for the Securities and Exchange Commission to take 
advantage of the opportunities created by advancements in 
technology to preserve and strengthen the securities markets.
    In response to this congressional mandate, the SEC has 
adopted various rules since 1975 to further the objectives of 
the national market system, including Regulation NMS in 2005.
    The implementation of Regulation NMS has contributed 
positive results to our markets. Market quality and reliability 
continue to improve, and retail customers now have low cost 
immediate access to our markets with exceptional execution 
quality.
    However, Regulation NMS has also contributed to some 
unintended consequences throughout the marketplace. While order 
protection is beneficial to displayed limit orders, the 
existence of order protection provides new or relatively small 
exchanges with a commercial advantage, despite not having to 
demonstrate their value to the marketplace.
    Any competitive benefit that may result from an additional 
exchange can be offset by the increased costs and complexity 
relating to the required connectivity to an additional market. 
The U.S. equity market currently supports 12 equity exchanges 
and over 40 SEC-registered dark pools. I assure you that was 
not what Congress anticipated in 1975.
    Now, complexity and fragmentation is not itself a problem. 
Our market quality for retail orders clearly reflects that we 
have professionally solved for these two challenges. However, 
certain orders and certain market participants experience 
serious challenges as a result of this fragmentation and 
complexity.
    The handling of large orders for institutional customers 
has clearly suffered over the last 10 years. While spreads have 
narrowed, there is less displayed liquidity to satisfy large 
orders. The current market experiences a greater market impact 
as these large orders enter the market. And as a result, those 
large orders take longer to get executed and may experience 
reduced execution quality.
    This large order size problem affects our Nation's largest 
asset managers, including pension funds and mutual funds.
    These challenges that large orders experience are not in 
every symbol across the U.S. equity market. Those challenges 
are typically not experienced in more liquid stocks, which 
include large-cap names and ETFs.
    In this regard, I believe Reg NMS was critically flawed in 
its one-size-fits-all approach to our markets. Under Regulation 
NMS, all stocks are treated similarly regardless of market cap 
liquidity or public float.
    Our current market rules do not care if a stock trades once 
a month or 1 million times per day. Our market rules do not 
care if a company is valued at $800 billion or $25 million. 
This is not an ideal design for the largest, most diverse 
equity market on the planet.
    Given these flaws and the challenges that Reg NMS has 
crated in our equity market, I encourage the subcommittee and 
the SEC to undertake a comprehensive review of Regulation NMS 
to address some of these unintended consequences given the 
significant changes to our marketplace since its implementation 
in 2007.
    As part of a comprehensive review of Regulation NMS, we 
urge the subcommittee and the SEC to consider the 
appropriateness of the one-size-fits-all approach of the 
regulation.
    We also believe that other aspects of Regulation NMS 
warrant reconsideration. We believe the outdated access fee cap 
and the prohibition on locked and cross markets are both worth 
revisiting.
    We also suggest consideration of a market structure that 
would only protect quotes displayed by exchanges that meet a 
minimum market share threshold, which is an approach used in 
the Canadian markets.
    I also recommend this subcommittee urge the Commission to 
study the recent phenomenon of what I call ultra-high priced 
stocks and their impact on investors and market structure.
    Currently over 13 percent of the overall market 
capitalization of the U.S. equity market is comprised of 
securities that trade above $200, including well-known names 
like Amazon and Alphabet, each currently trading over $1,000 
per share.
    While our current equity market structure has its flaws, I 
believe the U.S. equity market continues to be the most 
efficient and liquid markets in the world. I encourage any 
proposed reforms to carefully consider the impact of all market 
participants and the potential unintended consequences of the 
market.
    Thank you for the opportunity to appear before you today, 
and I am happy to answer any questions you may have.
    [The prepared statement of Mr. Concannon can be found on 
page 84 of the Appendix.]
    Chairman Huizenga. Thank you very much.
    With that, Mr. Comerford, you have 5 minutes.

                   STATEMENT OF JOHN COMERFORD

    Mr. Comerford. Chairman Huizenga, Ranking Member Maloney, 
members of the subcommittee, Instinet appreciates the 
invitation to participate in this important hearing. We believe 
that Instinet, an agency broker founded in 1969, can bring a 
unique perspective to this process.
    For nearly 50 years, Instinet has provided institutional 
investors with electronic agency trading services and 
technologies, services including the first electronic trading 
platform, the first U.S. crossing network in 1986 and some of 
the markets' earliest examples of direct market access, smart 
order routing and algorithmic trading strategies.
    Instinet has also been a leader in offering robust 
transparency to its clients with some of the first 
transactions, cost reporting and analysis tools in the 
industry. At its core, Instinet has been guided for nearly half 
a century by one primary goal: providing best execution to its 
customers.
    Looking back at 10 years of Regulation NMS, I believe we 
can definitely say that it has been successful in its goals of 
enhancing the efficiency of the market and supporting fair and 
vigorous competition.
    However, in order to retain our markets' competitive 
advantage we need to review whether our regulations, one, 
continue to provide a level playing field for vigorous 
competition, enhance confidence both for retail and 
institutional customers and continue to support innovation.
    As others on this panel will likely cover the regulatory 
path to NMS and share their insights into Rules 605, 606, 610 
and 611, I thought that I would discuss a less obvious but no 
less critical component to Regulation NMS, namely Rule 612, the 
Sub-Penny Rule.
    A little bit of history, the tick size on the primary U.S. 
exchanges began its decline in 1997, dropping from the 
longstanding one-eighth of a dollar--that is 12 and a half 
cents--to ``teenies'' or one-sixteenth of a dollar. This change 
was driven in many ways by competition from the ECNs at the 
time.
    In 2001, U.S. equity markets fully decimalized. It is 
worthy to note that it was decimalization more than Regulation 
NMS that drove average spreads down toward the levels that we 
currently experience.
    Rule 612 set the floor on this tick size compression, 
setting the minimum pricing increment of quotes and orders to 
one penny for all stocks trading over a dollar. At the time, a 
penny seemed reasonable, however, we now know that tick sizes 
can be both too large and too small.
    We better understand that our one-size-fits-all tick size 
can contribute to some of the unnecessarily complex and 
disorderly trading that we have been discussing on these 
panels.
    Markets are more efficient and orderly when costs and 
incentives are balanced for disparate market participants. As 
Mr. Lyons said in the previous panel, the tick size or spread 
is the primary incentive for liquidity providers to display the 
liquidity. And it is also the primary cost liquidity takers pay 
for immediacy of execution.
    For lower priced and higher volume names, a penny tick size 
can be too large. And when tick sizes are too large, 
competition at the NBBO becomes extremely fierce and volume is 
pushed toward dark pools and toward inverted exchanges. In 
general, the market gets extremely complex and there is a 
premium placed on speed and the use of advanced order types.
    On the other hand, for higher priced and lower liquidity 
stocks, even some of the stocks that Mr. Concannon just 
discussed just now, large stocks, small percentage tick sizes, 
think a penny on $1,000 is very little, reduce the incentive to 
post liquidity. Spreads increase and liquidity becomes hidden 
and more disorderly.
    Rule 612 was designed specifically to combat this activity 
specifically, and I quote, ``To promote greater price 
transparency and consistency, as well as to protect displayed 
limit orders and address the practice of stepping ahead of 
displayed limit orders by trivial amounts.''
    In conclusion, I would like to note that while I focused on 
one specific rule in Reg NMS, market structures issues are 
complex and inter-related. The tick size and the access fee in 
particular are completely related. Therefore, any material 
changes to market structure inputs are best considered 
holistically and comprehensively rather than independently.
    We at Instinet thank you for the opportunity to share our 
thoughts and opinions. I look forward to answering any 
questions you may have.
    [The prepared statement of Mr. Comerford can be found on 
page 78 of the Appendix.]
    Chairman Huizenga. Thank you. I appreciate that.
    Mr. Wittman, you are recognized for 5 minutes.

                    STATEMENT OF TOM WITTMAN

    Mr. Wittman. With time to spare. Thank you, Chairman 
Huizenga and Ranking Member Maloney for the opportunity to 
testify today. I applaud your hard work to bolster our public 
markets. Let me begin with a few observations about the U.S. 
marketplace.
    Our markets are the strongest and fairest capital markets 
around the globe. They are the envy of the world. U.S. equities 
are unmatched in liquidity, depth, and transparency. Only data-
driven analysis should underpin potential changes.
    Reg NMS is not perfect, but it has achieved its intended 
target of enhanced competition among exchanges, improved 
resiliency and lowered the overall cost of trading.
    Self-regulation remains critical to investors in the U.S. 
equities market. Investors must have confidence that the 
markets are fair and well-regulated.
    Without SROs, the SEC would face serious challenges to 
protect investors and ensure a fair and transparent market that 
is available to all. Without SROs, the SEC would have to grow 
significantly.
    The SEC's Equity Market Structure Advisory Committee 
membership lacks key viewpoints and its recommendations do not 
address broader and deeper issues, such as a lack of capital 
formation. Capital formation is a central issue facing the 
markets today.
    The focus of all market structure discussions should be how 
do we improve the liquidity and trading experience for small 
public companies?
    The trading environment fails to take in account the size 
and the needs of smaller public companies. Market structure has 
real and, at times, unintended impact. The smallest companies 
have had their trading spread across 50 venues. The 
fragmentation I believe hurts the trading in those securities.
    Market structure has evolved to better serve investors 
without regulatory or legislative action. For example, the last 
time NASDAQ testified before this subcommittee, the speed and 
resilience of market data was discussed often, and was again in 
the panel before us.
    Since then, NASDAQ has enhanced the NASDAQ securities 
information process for the SIP with state-of-the-art 
technologies that simultaneously strengthen resiliency and 
reduced processing time by over 90 percent, a technological 
advancement that NASDAQ is especially proud of to deliver to 
the markets.
    The duty to provide fair and equal access should be 
harmonized across all platforms to protect investors from 
unfair discrimination, avoid two-tiered markets, and unify 
liquidity that is fragmented over 50 execution venues.
    Regulators must consider the structural advantages of off-
exchange trading when considering new layers of regulation that 
could push additional trading off exchange.
    NASDAQ's perspective on market structure is unique. We 
operate closer to the intersection of capital formation and 
market structure than many market participants.
    Our revitalized recommendations center on many items this 
committee has already considered as part of the Financial 
Choice Act. You could find this in the full testimony that we 
presented in written format.
    The key regulations that form the foundation of today's 
markets, including Reg NMS and Reg ATS, were developed and 
implemented more than a decade ago.
    Today's liquidity dilemma stems from long-term trends 
toward fragmentation where liquidity is spread across too many 
trading venues, nearly half of the U.S. publicly traded 
companies, small and medium growth, trade more than 50 percent 
of their volume off U.S. exchanges. This hurts price formation.
    NASDAQ believes permitting issuers to choose to trade in an 
environment that concentrates liquidity for small and medium 
growth companies into a single exchange will allow investors to 
better source liquidity.
    The introduction of unlisted trading privileges gave rise 
to fragmentation, combined with a proliferation of ATSes. When 
it comes to UTP, the law of diminution of margin returns 
applies and we have far exceeded the point of which the benefit 
outweighs the cost.
    Every company listed in the U.S. markets trades with the 
same standard tick sizes but advancement in technology make 
this unnecessary. NASDAQ's experience and research demonstrates 
that one-size-fits-all for tick sizes is not appropriate, 
particularly in small and medium growth companies.
    NASDAQ believes that these companies should have the 
ability to trade on sub-penny, penny, nickel or even dime 
increments. Both NASDAQ and the NYSE petitioned the SEC for 
this reform many years ago, with nothing to show.
    We believe that implementation of an intelligent rebate fee 
structure that promotes liquidity and avoids market 
distortions. NASDAQ relies on liquidity rebates to motivate 
market makers to enter aggressive quotations in which return 
ensures that price discovery is accurate and reliable.
    This is critically important for illiquid securities. 
NASDAQ believes that a study for rebate levels must be well-
designed to help develop an intelligent fee rebate regime. We 
firmly believe that a blunt access fee pilot does not consider 
the impact of liquidity and could harm smaller company stocks.
    Establish regulatory harmony to protect more investors. 
Investor orders should be equally protected wherever executed. 
The Commission must explain whether 60 percent of orders that 
are executed on exchange merit a higher level of protection 
than the 40 percent of the orders executed off exchange.
    In times of stress or crisis, the Commission naturally 
turns to exchanges to add safety nets like Reg SCI, Reg SHO, 
limit up-limit down was a burden for exchanges to solve. One 
size does not fit all.
    Well-functioning markets require a mix of market 
participants, issuers, and investors. The system must 
accommodate passive investing, high-frequency trading and 
business models in between and perhaps, most importantly, the 
markets must work efficiently for all issuers, from 50 million 
in notional value to 750 billion.
    I look forward to the questions that this committee has for 
me. Thank you.
    [The prepared statement of Mr. Wittman can be found on page 
150 of the Appendix.]
    Chairman Huizenga. Thank you all for your testimony.
    We are going to try to move fast before we have votes--I 
have not seen a real recent, but the last I had seen somewhere 
between 1:15 and 1:30.
    I would like to start. I think primarily when Mr. Farley 
and Mr. Wittman and Mr. Concannon and all of you heard me ask 
Mr. Lyons and Mr. Brown from the previous panel about allowing 
broker-dealers and asset managers to have direct voting 
representation on NMS plan operating committees.
    I understand both NASDAQ and NYSE are opposed to that. Mr. 
Concannon, at CBOE, your exchange has not opposed necessarily 
giving broker-dealers, and I believe Mr. Katsuyama as well, but 
in view of a bit of a different animal at IEX.
    So I want to know if you would please address that and then 
also I want to give you a little time. Would you also like to 
address some of the points that were raised in the first panel 
with regard to SIP versus market data and any of those other 
issues?
    So Mr. Wittman, why don't we start with you?
    Mr. Wittman. OK. Yes, I was actually--when you look at the 
governance structure there, there are advisors from broker-
dealers that sit on that committee and have a voice in the 
conversation that takes place. It is correct they don't have a 
voting right, but there is more transparency on those 
committees as they are structured today.
    As we looked at the SIP re-platform that NASDAQ did, it has 
reduced latency extensively and we did a re-platform of that 
SIP. So we think they have adequate visibility and transparency 
into what takes place at those meetings right now.
    Chairman Huizenga. Mr. Concannon?
    Mr. Concannon. In the past--
    Chairman Huizenga. Before I actually get you, Mr. Wittman, 
is there anything else that you wanted to address from that 
first panel that you wanted to touch on?
    Mr. Wittman. No, that is it.
    Chairman Huizenga. OK. All right.
    Mr. Concannon?
    Mr. Concannon. I agree with Tom that the plan, the SIP plan 
and the governance has improved fairly dramatically over the 
last couple of years with respect to transparency and the 
advisory level participation.
    In the past, we had been supportive of introducing both 
buy-side and sell-side participants into the full committee of 
the SRO plan. We are willing to consider that kind of 
participation. I do think the SIP serves a valuable need for 
our markets and in fact, clients do see the SIP when they are 
going to execute a quote.
    If you look at some of the comments, I will address some of 
the comments from the prior panel with regard to market data, 
there is heated competition in market data around proprietary 
market data. We compete with both the New York Stock Exchange 
and NASDAQ for our proprietary market data, and we have seen 
adjustments in price for the benefit of the end user as a 
result of that competition.
    So I assure you there is thriving competition in the world 
of proprietary market data. I do think, and I agree with the 
prior panel, that there is probably more room for adjustment 
around the plan and the SIP plan itself.
    Chairman Huizenga. Mr. Farley?
    Mr. Farley. Yes, we are very strong proponents for more 
inclusion in policymaking around the plans. In fact, the New 
York Stock Exchange has really been pushing to strengthen the 
advisory committees that we have that have broad representation 
from throughout the industry.
    But one other point I wanted to make about the plans that I 
think is important is--and the SEC can make rules or the SEC 
can delegate to the NMS group that they go away and they make 
rules. And over the recent past, the SEC has been using that 
second approach far more often.
    And that engenders a good deal of ill-will. Quite frankly, 
the exchanges are perceived to then be in charge of 
policymaking. In reality what goes on is the SEC is directing 
that policymaking. And so--
    Chairman Huizenga. So you don't think that has been a 
positive?
    Mr. Farley. Right. I do not think it has been a positive. I 
think when the SEC goes through and does the work and goes 
through the appropriate legwork, the appropriate appropriations 
process, the appropriate cost-benefit analysis, public comment, 
you get a better rule that has more buy-in from the industry 
than if you go through this NMS rulemaking.
    Chairman Huizenga. Why has the SEC done that?
    Mr. Farley. You have have to ask the SEC. I don't want to 
speak on their behalf.
    Chairman Huizenga. Mr. Concannon?
    Mr. Concannon. In all honesty, it is quicker. It is a 
process that allows the exchanges to take on the burden of 
writing the rules, presenting them to the SEC for their 
approval. This did work in response to the Flash Crash with the 
exchanges getting together quickly and writing rules around 
limit up-limit down protections.
    So there are times when it works and when it is 
appropriate. But there has been a heavy use of pushing the 
burden of rule writing to the exchanges and the plans 
themselves.
    Chairman Huizenga. Do you agree that that has damaged those 
relationships?
    Mr. Concannon. Yes, absolutely. The Tick Pilot is a perfect 
example of where we really didn't agree on all points of the 
Tick Pilot, but we were mandated to deliver a set of rules that 
left the industry quite frustrated.
    Chairman Huizenga. OK. My time has expired. I would have 
loved to explored the IPO situation and I applaud Chairman 
Clayton expressing his concern as well. I think that is 
something we are going to need to address.
    So with that, I recognize the ranking member for 5 minutes.
    Mrs. Maloney. OK. Thank you, Mr. Chairman.
    And thank you to all of the panelists, a truly outstanding 
panel. I particularly would like to welcome Thomas Farley and 
Thomas Wittman from the New York Stock Exchange and NASDAQ, two 
extraordinary companies in the great city of New York, and 
really all of the panelists for being here.
    I would like to ask Mr. Wittman and Farley, the SEC's 
Equity Market Structure Advisory Committee has recommended that 
the SEC do a pilot program to test whether market quality 
improves with lower rebates.
    Do you think they should go ahead with this pilot program 
and if so, who should design it, the SEC or should they go with 
the committee of exchanges, like they did with the Tick Size 
Pilot Program?
    Mr. Farley. I will go ahead first.
    Mrs. Maloney. OK.
    Mr. Farley. Thank you for the nice greeting, and thank you 
for your service on behalf of the people of New York.
    Mrs. Maloney. Thank you.
    Mr. Farley. Great question, and it goes back to my comments 
from just prior about NMS rulemaking and asking the exchanges 
to make it versus the exchanges going through the effort 
themselves. We feel strongly that the SEC, if they so chose to 
engage in a rulemaking, should do so through the appropriate 
rulemaking process, as opposed to delegating that to the 
exchanges.
    Secondarily, just with respect to this Equity Market 
Structure Advisory Committee, we are not on that, nor is Tom. 
They got the composition wrong. We have been told that 
privately and even to some extent publicly.
    It does not include our input, therefore it doesn't take 
into account the listed company view, which quite frankly I 
would argue is the single-most important view there is.
    And so they didn't get it right with respect to this 
particular recommendation, and there is a lot of work to do.
    Mrs. Maloney. OK, thank you.
    Mr. Wittman. I would say when you take a look at access 
fees, I think they are looking at the wrong way to look at the 
cap and access fee. And as an exchange that looks to list 
companies, we have got 3,300 companies that we list, we are 
focusing on the small and mid-sized companies.
    I think you need to take the conversation more toward the 
rebate, how do we liquefy the small and mid-sized companies? 
And it could take varying different levels of a rebate in order 
to bring those companies to the public markets.
    So we are focused there on intelligent rebates, intelligent 
tick sizes and not so much on the access fee cap. And I think 
it is more small and mid-sized companies that we are focused on 
here.
    Mrs. Maloney. Thank you.
    Mr. Katsuyama, you said in your testimony that the prices 
that exchanges charge for market data bears no relationship to 
the cost of producing that data. And what are the costs for an 
exchange of producing market data? And second, how much lower 
would market data fees be if exchanges only charged the cost of 
producing that data?
    Mr. Katsuyama. So market data is produced in much the same 
way that a radio program would be broadcast, which means there 
is an upfront fixed investment in building an infrastructure. 
And then adding additional listeners to that market data comes 
with some incremental costs, but it is de minimis. It is 
plugging cables into a switch.
    We experienced this firsthand when IEX, before we traded 
our first share, we were subscribing to market data. We were 
paying over $1 million for market data, but you don't just pay 
for the data itself. You pay in the method with which you 
receive the data. You have to buy the cable. You have to rent 
the cable.
    If you look at the New York Stock Exchange for their most 
expensive, fastest cable and it is almost half a million 
dollars a year to rent that cable. And the cable itself is $500 
for a pair of them one time. It gets pretty distortive.
    Now, you could say, well, we plug these cables into a 
switch. But even if you allocate cost per switch, you are 
probably talking about a couple thousand dollars, $4,000 one 
time, which you are renting to me for almost half a million 
dollars a year.
    So I would say that it is distortive. It is probably 95 
percent plus margin, if we really got into the details. And we 
should look at those details, because when you are required to 
buy market data, it begs the question whether the prices for 
those data has any relationship with what it costs to produce 
it.
    And the challenge becomes is, as Chris said, we compete, 
there is no competition for an exchange producing their own 
data sold with access that they deliver in that datacenter. And 
I think that it is not a competition.
    Mrs. Maloney. OK. My time is almost over, so I would like 
to ask unanimous consent to place in the record statements and 
documents from Healthy Markets' ``Transparency and Trust'' and 
ModernIR, ``Market Structure.''
    Chairman Huizenga. Without objection.
    Mrs. Maloney. Thank you. My time has expired. Thank you. 
Thank you all.
    Chairman Huizenga. The gentlelady yields back.
    With that, the chair recognizes the gentleman from 
Minnesota, Mr. Emmer, for 5 minutes.
    Mr. Emmer. Thank you, Mr. Chair, and thanks to the panel. 
Mr. Wittman, if you would tell us about the current liquidity 
for the top 100 or so stocks listed on NASDAQ. Some say the 
structure is broken. Is that visible in most stocks, and if 
not, where is it visible?
    Mr. Wittman. Well, I think if you look at the liquidity 
profile in the top 100 stocks, there is a tremendous amount of 
liquidity. I think that is charged a bit with--in other 
committees or other market structure advisory committees--if 
you take a look at some of the rebates for those very liquid 
securities, you probably don't need a 30 mil rebate in order to 
liquefy those securities.
    So we are looking at the small, mid-sized companies, 
getting these companies to go public, and make sure that we 
have got a good reference price for those. And I think it is 
there where we struggle.
    Two factors: rebates, tick sizes, and maybe a third one 
would be off-exchange trading. The market makers that are in 
the public markets trying to fight the trade order flow, don't 
see that order flow in public markets, but they see them in 
ATSes. So those three factors, I think, is what we need to work 
on to charge the mid-and small-sized companies' liquidity.
    Mr. Emmer. Thank you very much. Let us just go another 
step. So I think you testified, or I read it in your testimony, 
that NASDAQ has supported the idea of intelligent tick sizes, 
and this is Mr. Wittman still. How would that compare to the 
Tick Pilot regime that is in place today?
    Mr. Wittman. So I think what we have done is we have taken 
a one-size-fits-all market, and then we have carved out another 
piece and put it into three buckets. So it is maybe three sizes 
trying to fit everything.
    I think in the Tick Pilot, there are some good and some 
bad, and I think you need to take a look at the securities that 
are reacting better and worse and be more intelligent about the 
size of the tick. They may be tick constrained, and also, with 
the same conversation, look at rebates because I think they are 
going to be tightly interwoven.
    Rebates for those securities and the size of the tick, 
whether it is pennies, nickels, dimes. There are securities 
that trade in a penny market that they could literally trade in 
probably a quarter of a penny market. So it is tick 
constrained. It could be even smaller.
    Mr. Emmer. Mr. Concannon, I think you also talked about 
tick sizes. Do you have any comment?
    Mr. Concannon. Yes. I would agree wholeheartedly with Tom 
on that concept. The one-size-fits-all clearly doesn't work. 
With regard to the NASDAQ 100, they are performing 
exceptionally well.
    Retail investors are experiencing phenomenal execution 
quality in those products, and institutional investors are able 
to move large sizes of liquidity through our market. So I do 
think at the top end of our market we have a robust and 
efficient market, and it is working.
    As you go down the tier of volume and liquidity, there are 
adjustments that we needed to make. One adjustment is clearly 
the tick size. The Tick Size Pilot does attempt to take a step 
in that direction.
    Mr. Emmer. But it is only adjusting it in one direction.
    Mr. Concannon. It is only adjusting in one direction, and 
it is fairly simple in its approach because it is a pilot. So 
there is more that we can do to really change how Reg NMS, 
which is a one-size-fits-all rule, treats each stock 
individually, based on its liquidity, based on its market cap.
    Mr. Emmer. Mr. Comerford, you were talking a little bit 
about this tick size as well and how it impacts what you do. We 
talk about, or at least the last panel did, and I think to some 
extent this panel has--we talked about how the cost of trading 
has gone down in the last decade plus, but what we are not 
talking about is where we have--well, we are talking about it, 
but not directly.
    With the reduced tick, the decimal system and the reduction 
in cost, what has this meant for the research and the analysis 
on different companies that is available to people out there?
    Mr. Comerford. Well, if I could first talk a little bit 
about the tick sizes really quickly. My point is that there are 
actually large-cap names that have the wrong tick size. So 
Alphabet has the wrong tick size.
    That is not enough consideration for liquidity providers to 
provide depth to the markets. So I think that we have to look 
not just at the liquidity of the stock, but also at the price 
of the stock.
    And we can also look across the Atlantic, where with MiFID 
II, EMSAC is making a change where they are changing and they 
are creating a tick size schedule. They already have tick size 
schedules based on price. They are creating tick size schedules 
based on price and liquidity.
    And because they are doing that, they are going to set up 
markets that are more uniformly orderly in their trading, maybe 
not uniform in their tick size, but uniform in their trading.
    Mr. Emmer. Thank you very much. I see my time has expired.
    Chairman Huizenga. The gentleman's time has expired.
    With that, the chair recognizes the gentleman from 
Massachusetts, Mr. Lynch, for 5 minutes.
    Mr. Lynch. Oh, thank you. Thank you, Mr. Chairman. I want 
to thank the panelists for coming before the committee and 
helping us with their work.
    Mr. Katsuyama, really appreciate the work you have done to 
democratize the markets, and I have one question though. It is 
a rather curious sort of oddity. So you have adopted this speed 
bump. This, what is it, 350--how long is the delay now?
    Mr. Katsuyama. Three hundred and fifty millionths of a 
second.
    Mr. Lynch. Yes, OK. That is what I thought. And I think 
that has--well, let me ask you, do you think it has 
accomplished its goal?
    Mr. Katsuyama. So I do think it accomplishes the goal we 
set out to which ensures essentially a lot of people view the 
race as a race between participants in the market, a fast 
trader versus a slow trader. We can't equalize necessarily that 
race, because you can't ensure that everyone gets the same 
information at the same exact time when people are in different 
geographies, different technologies--
    Mr. Lynch. Right.
    Mr. Katsuyama --Et cetera. Three hundred and fifty 
microseconds is really designed to ensure that IEX, as the 
market center that is pricing trades for buyers and sellers, 
that a participant can't get information and effect a trade on 
IEX before we get that same information, which gives us the 
ability to essentially price trades accurately and fairly.
    Mr. Lynch. Yes.
    Mr. Katsuyama. I think that the challenge that we have is 
that when market centers, when exchanges are incentivized to 
sell tiers of speed, like microwave services, but then they use 
fiber connectivity to price trades in their market, they are 
essentially selling people the ability to know prices before 
they do.
    Mr. Lynch. Right.
    Mr. Katsuyama. I think that undermines the fairness of the 
market, and I think undermines confidence in trading.
    Mr. Lynch. I get that. I get that. I only have 5 minutes 
though, Mr. Katsuyama. So do you think it has been working? 
Would it be fair to say it is working? It seems to have 
equalized or brought closer together the high-speed trader and 
the average investor out there.
    Mr. Katsuyama. I think that what it has done is it has 
taken a certain segment of high-speed trading that essentially 
is wait-and-see arbitrage, and it has minimized that--
    Mr. Lynch. OK. I agree.
    Mr. Katsuyama --Which is--
    Mr. Lynch. And that is a good thing. I thank you for that. 
The curious part is that I know you wrote a letter to the New 
York Stock Exchange on their American Exchange, the smaller 
fund there, made a move to adopt a similar 350 millionth of a 
second speed bump, which doesn't sound like a lot, but I guess 
it is.
    And IEX, much to my surprise, wrote a letter against them 
adopting a speed bump. Now, if it is just competitive advantage 
that you are seeking, I am OK with that, but if there is 
something else there--
    Mr. Katsuyama. Yes. The letter actually didn't oppose the 
fact that a market wanted to copy exactly what we had built.
    Mr. Lynch. OK.
    Mr. Katsuyama. The letter asked that the New York Stock 
Exchange clarify why they wanted a speed bump, because the 
irony is that the speed bump is required because of the things 
that New York Stock Exchange and ARCA sell to their 
participants. So New York, on two of their exchanges, is 
enabling traders to trade at very high speeds--
    Mr. Lynch. Yes.
    Mr. Katsuyama --which--and we, as a market, need to protect 
ourselves. So we found it ironic that New York wanted to launch 
a speed bump market to protect people in that market from the 
two other markets they run. We wanted them to tell us why.
    Other than just we want to give people choice, because if 
really choice is about investor protection from high-speed 
trading practices that are predatory, then why wouldn't 
everyone make that choice? And I think that gets to the heart 
of really my written and verbal testimony. People are being 
paid to make choices that are contrary to their clients' 
interest.
    Mr. Lynch. OK.
    Mr. Katsuyama. So we are OK with competition. We are not OK 
if that competition doesn't clearly state the purpose of the 
market that you are trying to build.
    Mr. Lynch. All right. That is fair enough. Thank you. Thank 
you for clarifying that. And I appreciate the good work that 
IEX is doing, and I am a fan.
    Mr. Katsuyama. Thank you.
    Mr. Lynch. Mr. Wittman, can you talk about the current 
liquidity that is seen by the top 100 or so stocks that are 
listed on NASDAQ versus everybody else?
    It seems all this talk about liquidity is great for the 
well-known stocks and highly traded stocks, but I also suspect 
that there is a dearth of liquidity if you are a smaller 
company, a startup, more of the innovative and smaller 
companies coming up. And there are some that say that the 
market structure is broken in this respect. Can you--
    Mr. Wittman. Yes. I think it goes back to our one-size-
fits-all kind of conundrum, where you have got rebates and 
markets structure that may be working for a class of 
securities, and they are probably the very liquid securities. 
You can make arguments that those tick sizes should be smaller 
and that rebates could be smaller in those names.
    We are focused on those mid- and small-cap names. They are 
under-liquified. We have talked about proposals to have 
unlisted trading privileges revoked for those, have them trade 
on the exchange and try to pull that liquidity into those 
securities.
    And at the same time, as part of my testimony, I talked 
about more than 50 percent of trading in those kind of 
securities are trading off-exchange. So there is less and less 
of a reason for market makers to liquefy those securities, 
which is a concern.
    Mr. Lynch. Thank you.
    I thank you, Mr. Chairman, for your courtesy. Thank you.
    Chairman Huizenga. The gentleman's time has expired.
    The chair recognizes as this time Mr. Hollingsworth from 
Indiana for 5 minutes.
    Mr. Hollingsworth. Hey, good afternoon. I really appreciate 
everybody being here.
    The first question I wanted to ask was actually to Mr. 
Wittman. You had said something earlier. You said, ``We have 
gotten to the point where the costs outweigh the benefits in 
terms of the dispersion of trading in order fulfilment 
venues.'' Can you walk me through some of that analysis and 
your thoughts on that?
    Mr. Wittman. Yes, I think as you add fragmentation--so 
there has been, Chris and others have talked about--
    Mr. Hollingsworth. Right.
    Mr. Wittman --it spurs the ability to startup new 
exchanges. We have six medallions. We could start three new 
equity exchanges. And those are protected venues. So there is 
cost associated with all of our customers, all of our members 
and broker dealers.
    So there is cost to them, so what is the actual benefit 
that we can bring to those and to the marketplace? And you can 
only get to a certain level of some creativity there.
    Mr. Hollingsworth. Right.
    Mr. Wittman. We think we can probably do a few new things, 
but that is why we say, and that is what I say that cost is 
starting to get to the point with Reg NMS that I think we have 
overstayed our welcome with those protections.
    Mr. Hollingsworth. OK.
    With Mr. Farley and Mr. Wittman, earlier today, I heard 
some testimony from individuals that talked a little bit about 
how, in their view, and in their humble opinion, that order or 
execution quality was significantly poorer on exchanges for 
small retail mom and pop orders.
    And they talked about how that divergence doesn't seem to 
be getting smaller. Instead, it seems to be the same or getting 
wider over time as alternative venues to order fulfillment seem 
to be better. Can you talk a little bit about why that might 
exist and why that divergence seems so great today or as great 
today as it was 3 or 4 years ago instead of converging?
    Mr. Farley. Pardon me, could you just repeat, what is the 
diversion you are referring to?
    Mr. Hollingsworth. Yes. So earlier today there was some 
testimony that for mom and pop kind of order, classic retail 
investor orders that the quality of execution on exchanges 
versus other types of venues is significantly poorer.
    They talked about how so many orders tend to be fulfilled 
outside of the spread instead of inside the spread. And they 
felt like they were making up spread by going elsewhere.
    It as curious to me why that hasn't converged over time and 
why exchanges haven't gotten more and more competitive with 
regard to kind of retail order.
    Mr. Farley. Yes. Generally, it was a little head-scratching 
for me. There were a couple comments in a row arguing that 
executions on exchanges, including New York Stock Exchange, are 
worse than executions off-exchange, which is the opposite of 
what I have seen.
    But there is a notable exception, and it relates to this 
conversation of tick sizes. So take Bank of America stock, very 
large company, high market cap, very liquid, low-priced stock. 
Let us call it 20 bucks.
    Mr. Hollingsworth. Yes.
    Mr. Farley. An exchange trades it at $0.01 increments. But 
the theoretical spread for that stock may be one-tenth of a 
penny or one fifth of a penny or you get the idea.
    Mr. Hollingsworth. Right.
    Mr. Farley. On an exchange, we can only execute at a penny.
    Mr. Hollingsworth. Right.
    Mr. Farley. Now, we can do a midpoint or half a penny, but 
no real variations in between. So actually, there is an ability 
for retail trades on dark pools and non-exchange venues to 
customize that, execute a price at a better value for a 
particular retail trade or on a particular trade.
    So there is one real disadvantage that we have, and to some 
extent we have our arm tied behind our back because of that, 
but also because those dark pools can pick and choose exactly 
who can play in their venue and pick and choose exactly what 
the economic terms are. So that is something that we wrestle 
with.
    Mr. Hollingsworth. OK. Last question, and this is probably 
too much curiosity, but I hear and have seen a lot of 
demonization of high-frequency traders. Do they provide any 
benefit to the markets, not just to themselves, but to markets 
overall?
    And I will start with Mr. Farley and then Mr. Katsuyama.
    Mr. Farley. Yes. Proprietary market makers are hugely 
important for our markets, and we do what we can to attract 
them. We do not demonize them.
    Mr. Hollingsworth. Yes.
    Mr. Farley. And we appreciate their business.
    Mr. Hollingsworth. Fair enough.
    Mr. Katsuyama. I think the term is too broad to think that 
everyone is going to use technology today to purely provide 
charitable benefits to the rest of the economy is not accurate.
    Mr. Hollingsworth. Right.
    Mr. Katsuyama. I think there are some high-speed traders 
that use technology to benefit the markets, and there are some 
that very specifically do not. And I think that it is the 
exchange's role to ensure that those who do not--
    Mr. Hollingsworth. But we--
    Mr. Katsuyama --don't have as important of a role to play 
in the market.
    Mr. Hollingsworth. Well, I don't believe they are doing it 
for charitable purposes, but the old Adam Smith, people 
following their own profit motives may lead to better outcomes 
for all of us together. I am just curious whether those trades 
play some role in adding more and more liquidity to the market.
    Mr. Katsuyama. So those who add liquidity, I think, do 
provide some semblance of positive aspects. It is those who 
remove liquidity.
    Mr. Hollingsworth. Yes.
    Mr. Katsuyama. A recent academic study said that. And when 
studying electronic traders, they are adding to the thick side 
of the book and removing liquidity from the thin side of the 
book. And their ability to remove liquidity is actually faster 
than those regular. So it is creating more volatility rather 
than dampening.
    And one other aspect, just on your prior question is, I do 
agree with Mr. Brown, in talking about exchange execution 
quality not necessarily being as good inside the spread.
    This relates back to my prior comment to say that when an 
exchange trades inside the spread, it is their responsibility 
to determine the price inside the spread, i.e., what the 
midpoint is.
    Mr. Hollingsworth. Right.
    Mr. Katsuyama. So when you are selling people the ability 
to understand the midpoint before you do, anyone who rests an 
order there gets picked off.
    Mr. Hollingsworth. Yes.
    Mr. Katsuyama. So if you are consistently picking off 
people who are resting liquidity, you are not going to have as 
much liquidity inside the spread.
    Mr. Hollingsworth. Right.
    Mr. Katsuyama. IEX has built something differently, which 
is back to Mr. Lynch's point, which is why things are 
successful. So exchanges could improve the execution quality, 
but it would come at the expense of selling high-speed data and 
technology, which is not necessarily in their best economic 
interest.
    Mr. Hollingsworth. That is fine. That is fine. Makes sense. 
Thank you.
    Chairman Huizenga. The gentleman's time has expired.
    With that, the chair recognizes the gentleman from Georgia, 
Mr. Scott, for 5 minutes.
    Mr. Scott. Thank you very much, Mr. Chairman.
    Mr. Farley, I grew up in a little town called Scarsdale, 
New York. And when we were kids in Fox Meadow High School, our 
class project was to go out, earn our own money and go down to 
the New York Stock Exchange and buy stock. It was a very 
pivotal time in my life, the closeness.
    So I want you to understand how much affection I have for 
the New York Stock Exchange. And I am invested in stocks ever 
since, and it helped me in my education all the way up to the 
Wharton School of Finance at the University of Pennsylvania, 
that exposure.
    So I was very concerned when I found out today that the New 
York Stock Exchange trading is in decline. Could you tell me 
why?
    Mr. Farley. First of all, Congressman, I skip to work every 
day, in part, because I get to hear great stories like yours. 
In fact, Warren Buffett, and he said I could quote him on it, 
told me when he was 10 years old, he visited the New York Stock 
Exchange--
    Mr. Scott. Yes.
    Mr. Farley --and it set him on a path to free enterprise 
the rest of his career.
    Mr. Scott. And--
    Mr. Farley. So thank you for sharing that. Thank you for 
your great work in the 13th, and as you know, we are dually--or 
you may know, we are dually headquartered in Georgia and New 
York, so we are a proud Georgian company.
    Mr. Scott. And that is why when Jeff Sprecher said that you 
all were buying the New York Stock Exchange, man, what a great 
thing that was. That is why I am anxious to hear you say why 
the trading is in decline.
    Mr. Farley. Well, I appreciate you giving me that 
opportunity, and reports of our demise are very premature. I 
don'twant to crow about our success, but our trading is not in 
decline.
    We are the market leader and the global leader, 
Congressman, both for trading, absolute number of shares, but 
of more pride to me in terms of listings we lead the world. We 
are still a beacon for free enterprise throughout the world.
    This year we lead the world in IPOs and follow-ons and 
equity volumes, so you need not worry. We are not in decline.
    Mr. Scott. OK. Another question I have, Mr. Farley and 
other members, I am really worried about terrorism and 
cybersecurity needs. Could you all share with us, I mean, I do 
not want you to tell us too much because you have a lot of 
people out there who would do us harm.
    But what is the status of it? What can we in Congress do or 
need to do? Because quite honestly, I believe that the cyber 
terrorism is the greatest threat to our country right now.
    And I think you all see that as you look more and more at 
what Russia is or is not doing and other countries, and even 
those who really want to do us harm, like ISIS. Do we have to 
worry? Do you guys have it in secure shape for the nation?
    Mr. Farley. We, too, at the New York Stock Exchange and I 
suspect my colleagues share your concern, both in terms of 
physical attacks and cyberattacks, and just to answer your 
question directly, anything you can do to encourage public-
private partnership information sharing with the agencies on a 
real-time basis, as well as allowing competitors to share 
information free of concerns about collusion and anti-trust, 
anything you can do in those realms is very helpful.
    Mr. Scott. All right.
    Yes, sir, Mr. Concannon?
    Mr. Concannon. Yes, I would love to add, we all compete 
very aggressively for every share, every market share in our 
market. But when it comes to cyber, that is when we all 
partner. And that is the key, as Tom mentioned.
    The ability to partner and share information about recent 
penetration attempts or any signals that we are seeing as a 
result of cyberthreat, it is a critical area for our markets.
    I will tell you that all of our markets can only be 
accessed through a proprietary network. So there is no Web-
based access to our production platforms in the datacenters 
that they sit. So it is very hard for cyber to penetrate those 
networks.
    That doesn't mean we don't take extraordinary protections 
of those networks because I agree with you that that is one of 
our No. 1 threats is cyber trying to attack our, just generally 
speaking.
    Mr. Scott. Yes.
    Thank you, Mr. Chairman, appreciate it.
    Mr. Emmer [presiding]. The gentleman yields back--
    Mr. Comerford. If I could add one thing there--
    Mr. Scott. Yes.
    Mr. Comerford --not as an exchange? One benefit of the 
fragmentation that people don't complain about a bit, one 
benefit is that I believe we have tremendously resilient 
markets. So we do not have a single point of failure.
    There are different places to trade. The exchanges are 
talking about how they can provide resiliency amongst the 
exchanges, and I think that that is really good for the market.
    Mr. Emmer. The gentleman's time has expired.
    The chair now recognizes the gentleman from Ohio, Mr. 
Davidson, for 5 minutes.
    Mr. Davidson. Thank you, Mr. Chairman. Thank you to our 
guests. I really appreciate your written testimony, and what 
you have already shared with us today. So it is an honor to 
talk with you.
    Mr. Concannon, I wondered if you can add some clarity to 
the consolidated audit trail that has been in the works for a 
long time. Two things, one, it doesn't include futures trades, 
which your firm knows a fair bit about.
    And two, and I will expand this to all of you at a point, 
it seems that your firms actually sell data that we would 
already want to know as part of this audit trail. I guess what 
is different about the data you already have other than it 
would be standardized if you put it into some other package?
    Mr. Concannon. Great question. I do think there is some 
confusion about the consolidated audit trail and where things 
stand with regard to our current surveillance systems. The 
consolidated audit trail was originally crafted in response to 
the Flash Crash and an effort to understand the market in-
depth.
    Right now, FINRA sees all of our data. Everyone sitting 
here shares their data, their full depth of book to FINRA, and 
FINRA also has the entire OTC market in their data base and 
surveils that data either on behalf of the exchanges, which we 
also surveil our own data, but also on behalf of FINRA's own 
members.
    So today, there is a very vibrant system of surveillance 
across not only our equity markets but also our options market. 
And the consolidated audit trail is the next step in the 
evolution of surveillance in the U.S.
    So we are not missing things today. It is critical that 
everyone understands that our public markets are today 
protected by some of the most sophisticated surveillance by the 
New York Stock Exchange, NASDAQ and obviously the CBOE.
    The consolidated audit trail is taking a lot longer than we 
would want. There are some sizable costs that the industry is 
going to have to bear to install it to finish the completion of 
the build. And I think the SEC is going to continue to evaluate 
what those costs are and the benefits given how much FINRA does 
today in surveilling our market.
    Mr. Davidson. Thank you.
    Yes, Mr. Farley?
    Mr. Farley. Can I just make one quick comment, perhaps 
tying something that Congressman Scott said together with this 
conversation about the CAT.
    There was a decision made with the CAT to include personal 
identifying information of all market participants as part of 
the CAT. That gives us great concern that one entity will have 
access to all of this sensitive personal information from every 
man and woman who participates in the equities markets.
    Mr. Davidson. Don't you already sell that information 
though? Like if I were a broker I could buy stuff to track some 
of this stuff or not?
    Mr. Farley. No, we don't have--as far as I know we don't 
have any. And that is of considerable concern for us and it is 
going to lead to a lot of the cost of the CAT in procuring that 
personal identifying information.
    Mr. Davidson. OK. So here is the challenge that people say, 
hey, one of the reasons we need this, obviously with the Flash 
Crash and everything else, talk about cyber, talk about 
manipulation on a very large scale, sure it is hard.
    I don't know how many new markets are launched a day. I 
think it is less than one a day, but it seems like they are new 
all the time, right? And I don't know what the theoretical max 
of numbers of markets are for the United States, but it looks 
like we are on a path to discover that.
    If I am trying to solve a problem, I am a manufacturing 
guy, collecting data is really vital. How do you determine a 
root cause? How do you determine what went wrong, when it went 
wrong. You can't fix it without knowing certain things.
    If none of that is knowable, which is the whole point of 
CAT, what would be the fix? I mean, FINRA has already got the 
truth or what?
    Mr. Concannon. Yes. I mean, right now the key to 
surveillance is the data, as you mentioned, and consolidating 
all of our market data in one place that then can be surveilled 
for patterns of behavior, that exists today. It is called 
FINRA.
    We share our data with the regulator called FINRA and they 
provide surveillance services on behalf of the exchanges. We, 
too, each of the individual exchanges sitting here, also 
surveil that data to look for our own patterns to ensure that 
FINRA is finding everything that they can find.
    So I would say we are in a very good state when it comes to 
surveillance of our markets and CAT is the next step. And I 
would agree with Tom, the introduction of personal information 
into CAT and that has exploded the cost of CAT, and mostly as a 
result of the potential cyberthreat and the demand and access 
for that information.
    Mr. Davidson. Thank you all. I am sorry I couldn't get to 
more. My time has expired.
    Mr. Chairman, I yield back.
    Mr. Emmer. The gentleman's time has expired.
    The chair recognizes the gentleman from California--
    Mr. Sherman. My first question will--
    Mr. Emmer --Mr. Sherman for 5 minutes. Sorry.
    Mr. Sherman --build on Mr. Scott's question about getting 
more companies listed and available for investment by the 
general public.
    Mr. Wittman, I understand that the number of public 
companies was 8,000 back when I got to Congress in the 1990s, 
and is now down to 4,000. Now, there are a number of things 
that could have affected that, such as the dotcom bubble or the 
2008 crisis or maybe it coincided with me coming to Congress.
    In any case, the trend seems to be that companies are 
staying private longer. Facebook, a lot of us would have liked 
to invest before 2012. What are the benefits of public markets 
and exchanges like NASDAQ, Mr. Wittman, and what do we do to 
try to get a greater percentage of companies to go public and 
perhaps earlier in their development process?
    Mr. Wittman. Yes, this is an area that we are manically 
focused on, and I think to get a full feel for it, if you look 
at ``The Project Revitalize It'' that we published, you will 
get a good feel for it.
    But there are more and more companies that are electing to 
stay private. Private equity is involved with that. As a 
company attempts to go public there are a lot of frivolous 
lawsuits that put the fear into some companies. Maybe the 
burdensome 10-Q process, which we look to maybe revamping that.
    But all in all, I think that we can make some changes to 
the process for these companies to make it easier for them to 
go public and maybe we can get this turned around for the small 
and mid-sized companies.
    Mr. Sherman. Not only easier to go public but perhaps less 
burdens on being public. But at the same time some of the 
things that we have imposed on public companies, such as 
conflict diamonds and conflict minerals rules. We ought to 
figure out a way to apply those to public companies if they are 
important.
    If they are important that our society know about that, 
that is a burden should fall on major private companies as 
well. If it is not important and you impose it on public 
companies, you disadvantage going public.
    Mr. Katsuyama, your fellow exchanges charge for market 
data. You don't. Why don't you? Should they? Should you?
    Mr. Katsuyama. Yes, so when we look at what it costs to 
produce and distribute this market data, we build that into a 
trading fee. And I think that market data in many ways is 
interconnected with the system of paying out rebates or 
kickbacks for order flow.
    The net revenue from trading continues to decline for 
exchanges because when you are paying $2.5 billion a year for 
people to trade on your market you have to find ways to make 
money elsewhere. So those sources end up becoming listing fees, 
market data fees, technology, other connectivity costs which 
are skyrocketing.
    And I think that is what you have heard from the industry 
today is that the industry is under the weight of those 
increased charges, but those charges in many ways are related 
to make up for the fact that all of this money is being paid 
out for rebates.
    And I think that the challenge has become that we have 
packed regulation on top of managing this conflict. Things like 
a ban on locked markets, access fee cap, you look at some of 
the regulation that we are struggling with they are designed to 
manage a conflict as opposed to just addressing the conflict 
head on.
    And in many ways an efficient market, a competitive market 
shouldn't really allow for kickbacks. And I think that--
    Mr. Sherman. But the--
    Mr. Katsuyama --that is what we struggle with. And I think 
that is a universal--
    Mr. Sherman. Well, let me cut you off there--
    Mr. Katsuyama --sore point.
    Mr. Sherman --because I am going to try to squeeze in one 
more question.
    Mr. Farley, are there any listing standards on your 
exchange in terms of the rights of minority shareholders or the 
efforts of management to create total security for themselves, 
whether they are acting in the best interest of shareholders or 
not?
    Do you require that shares be voting shares or that 
cumulative voting be allowed or is there any protection or is 
it whatever the government will allow?
    Mr. Farley. Yes. The short answer is yes, but I don't have 
our listing standards committed to memory. And so there 
certainly are minority shareholder protections and there are 
rules around voting. But is there one question in particular 
that you were more interested in hearing the answer to?
    Mr. Sherman. Basically all of the efforts to protect 
shareholders and especially minority shareholders.
    Mr. Farley. Yes, sure, but if OK by you I will go back 
and--
    Mr. Sherman. And I look forward to getting your--
    Mr. Farley. Yes, thank you.
    Mr. Sherman --answer for the record.
    Mr. Farley. I will submit it to you.
    Mr. Sherman. And I yield back.
    Mr. Farley. Thank you.
    Mr. Emmer. The gentleman's time has expired.
    The chair now recognizes the gentleman from Arkansas, Mr. 
Hill, for 5 minutes.
    Mr. Hill. I thank the chairman. Appreciate the panel being 
with us today and this is a really important topic. It is one 
that we have got two great panels on today, and I appreciate 
everybody expressing their views candidly to try to help us 
move this topic forward.
    Appreciate IEX's innovation and leadership in the market, 
and Mr. Katsuyama, I appreciate your prepared testimony, which 
I looked at but I am--and the comments you just made.
    I am interested in getting Mr. Farley's response to that 
you were asserting maybe that broker-dealers, because they are 
paid for order flow, were ignoring their best execution 
responsibility, which I think that is what you asserted.
    I just would like Mr. Farley's response to that because 
that is an important--I know where you are coming from but I 
would love to hear Mr. Farley's response to that.
    Mr. Farley. Sure. As I see--
    Mr. Hill. Well--
    Mr. Farley. And indeed you are right. On the floor of the 
exchange I think we were in front of the Dillard's sign there.
    I think broker-dealers are conscientious actors. And so I 
didn't come here to demonize one particular market segment or 
another is the short answer to that question.
    Broker-dealers and others acknowledge that there is an 
inherent conflict of interest with respect to rebates. The 
question is how do you set up the right structure to deal with 
that? Over time how do we minimize the existence of that 
conflict of interest?
    You didn't find our testimony riddled with accusations. 
There are a lot of good actors in this market. And we should 
all work together to minimize conflicts while keeping the 
listed company in mind.
    Mr. Hill. Well, do you think that the dealer community and 
the asset manager community should be involved in the oversight 
of the SIP--
    Mr. Farley. Yes.
    Mr. Hill --process?
    Mr. Farley. Yes. And with the way we have advocated for is 
we have an advisory committee that we have made more and more 
active over time. And if we are not taking in those views then 
we are going to have incomplete policymaking.
    Mr. Katsuyama. May I respond to that?
    Mr. Hill. Yes, Brad, yes.
    Mr. Katsuyama. So I think two things. I think if you ask 
anyone on the advisory committee whether they feel like that is 
a valid committee and role I think they would say no. So I 
don't think that that gives the full amount of transparency 
that people are looking for in the industry.
    I think the second part is that, yes, some brokers do 
manage this conflict well. Others don't. I think the ones that 
don't actually end up making more money. I know from a broker 
standpoint routing for rebates makes your business more 
profitable. It delivers worse results to your client.
    And if you just look at public data, publicly available 
data, the longest lines to buy or sell stock are on the 
exchanges with the lowest likelihood of getting executed and 
the worst execution quality after you buy or sell shares. They 
have the longest lines.
    In any business, in any state of humanity, no one will get 
on the longest line for the worst outcome. That is what exists 
today. So I don't need to accuse anyone of anything. Look at 
public data. The public data tells you everything you need to 
know.
    Mr. Hill. Thank you, Mr. Katsuyama, good conversation on 
that issue.
    Mr. Comerford, you noted in your testimony that Instinet 
only considers a third of all U.S. stocks to have the right-
sized minimum price increment. Could you peel that back and 
give us a little bit more information on that assertion?
    Mr. Comerford. Sure. Thank you for the time. So what I was 
talking about is if you think about the one-size-fits-all tick 
size, absent the tick pilot that we have in our market, the 
penny, a penny is a very different percentage on a $10 stock 
and a $100 stock and a $1,000 stock. And we have $1,000 stocks 
in our market.
    My point is also that the tick size, more than anything, 
even more than the access fee, is still the No. 1 reason why 
people display liquidity. We know that when the percentage, 
when the consideration--the markets work better when costs and 
considerations are balanced, when the costs and considerations 
are balanced between liquidity providers and liquidity takers.
    I think of it like a balloon. If you squeeze it too hard in 
one place it is going to pop out somewhere else. When the tick 
size is very large as a percentage terms, what happens is that 
the consideration for liquidity provider is high.
    That means that a bunch of liquidity providers want to 
provide liquidity we get very deep queues, the long lines. We 
get long lines across all exchanges, whether they are maker-
taker, inverted, or IEX. And that contributes to the complexity 
and difficulty to trade.
    The other side of the equation is when the stock price is 
too--when the stock price is large and the tick size is too 
small, there is very little incentive for liquidity providers 
to provide liquidity. Spreads actually get very wide.
    A lot of the trading actually happens inside the spread and 
again, it is very complex and I think that does not contribute 
to confidence in our market.
    Mr. Hill. Thanks for your perspective on that.
    Mr. Chairman, my time has expired.
    Chairman Huizenga [presiding]. Time has expired.
    And that is votes being called, but we are going to try to 
get through these last two here.
    Mr. Poliquin from Maine for 5 minutes.
    Mr. Poliquin. Thank you, Mr. Chairman, very much.
    Thank you all very much for being here. I appreciate it. It 
seems like everybody in this room, and they should, has a great 
story about the equity market, about capital formation, about 
jobs, about savings.
    When I was a kid growing up in a small town in Maine, I 
used to go over to my buddy's house all the time. In particular 
because of his dad, who was the only person in town who bought 
a copy of the New York Times.
    It was the only copy in town and the reason why he bought 
the copy of The New York Times is because there was a quote 
section for the stock market. And that was way before most of 
you folks were born.
    But in any event, I was absolutely fascinated to understand 
that someone who grew up in a small town of Maine and dug sewer 
lines and painted metal roofs and cut grass could buy a piece 
of the American economy. How cool was that? And grow with the 
economy and grow with these companies.
    And I still have the first share, one share of Bath 
Ironworks my dad bought me for Christmas when I was 12 years 
old. But in any event, it is good when you people help us help 
retail investors, savers for their retirement, savers for 
feeble, for their kids go to college.
    It is good when you help them go public so these companies 
can grow and create jobs and pay their employees more and 
savers and investors can grow with the companies that you bring 
public.
    And it was Mr. Sherman, I believe, that mentioned this a 
minute ago, that we only have half the number of companies that 
are public today that were 20 years ago. That is not good for 
America.
    So my question to you Mr. Farley is why do you think this 
is the case? I know Mr. Wittman mentioned a couple issues about 
lawsuits and so forth and so on or the liability of lawsuits 
when you go public.
    In your opinion sir, why do you think we have so few 
companies that have decided to go public instead of staying 
private? And how can we fix that problem, sir?
    Mr. Farley. First I was hanging on your every word. I 
couldn't agree more. We have the IPO of Blue Apron coming up 
this Thursday. Those are the best days of the exchange. That is 
money going into a great business that can go make the world a 
better place.
    There are a number of issues. I mean, there is--and please 
don't quote me on this exact figure. I could be wrong a hundred 
either way. But over the last 10 years I believe there have 
been 3,500 shareholder class action lawsuits.
    Mr. Poliquin. Yes.
    Mr. Farley. So if you are a public company there was a 
pretty good chance you had to deal with one of those. And if 
you are Bar Harbor Bankshares in your district, that is a big 
deal.
    Mr. Poliquin. It is a very big deal. That is a great 
company.
    Mr. Farley. If you are JPMorgan it is a less big deal, but 
if you are Bar Harbor Bankshares that is a big deal. If you 
have to deal with a proxy advisor's report that was published 
without your knowledge that inadvertently includes erroneous 
materials, you are behind the eight ball with shareholders. And 
that is a difficult situation to be in.
    Similarly, if you look at Sarbanes-Oxley 404, that was a 
vote that passed in the Senate I believe unanimously, maybe 99 
to zero. So this was something that had--it was good policy 
intended there.
    What wasn't intended is that it would get bigger and bigger 
and bigger every year. And every year there are new rules 
propagated by the regulators that is making it more and more 
onerous to comply with.
    And then finally there is a shareholder ownership reporting 
regime that is over a generation old in this country. These 
companies are frustrated that they don't better understand 
their shareholders. Who shorts their stock, who owns options 
and what the value of those options are and somewhat more real-
time information about their shareholdings.
    Although that is a more complex issue because those 
shareholders would argue, and rightfully, there is real 
intellectual property in it.
    So there is a roadmap there to bring America back to that 
period of 350 being the minimum number of IPOs, to allow the 
Bar Harbor Bankshares to flourish, but it is going to take not 
just work from those of us at this table but some of the work 
here in Washington as well.
    Mr. Poliquin. Mr. Farley, I really appreciate these 
comments. Mr. Farley, let us talk a little bit about short 
selling. We may as well. You can do it. You can bet against a 
company by borrowing the shares at a certain price on promising 
to pay them back at a later date. And if in fact the company 
shares go down you make money.
    What do you think about that and how does that impact a 
company's decision that is private on whether or not they want 
to go public?
    Mr. Farley. It is. I have an emotional reaction which 
almost feels kind of icky and un-American. You are betting 
against a company.
    But the data-driven reality is, if you get into the 
numbers, allowing short selling in the economy is actually good 
for capital formation, tightens spreads and allocates the 
capital to the right companies at the right moment in time.
    So the real issue that our listed companies have isn't 
about short selling. In fact, very infrequently do I have a 
company argue it should be banned in its entirety. What they 
say is let us have a little more transparency.
    We have to report as investors our long positions every 90 
days, but we don't have to report our short positions. And just 
arming the company with a little more information like that 
could help make being public more appealing.
    Mr. Poliquin. Thank you gentlemen, appreciate it very much.
    I yield back my time, Mr. Chairman.
    Chairman Huizenga. The gentlemen yields back.
    The chair recognizes the Vice Chairman Mr. Hultgren.
    Mr. Hultgren. Thanks. As we all know there are votes and 
there are three of us that still want to have a quick question, 
so I am going to just ask about a minute, if that is all right?
    Mr. Concannon, if I can focus on you, thanks again for 
being here. Thanks for the great work the CBOE does. Wonder if 
you could respond quickly, I know the assertion that Mr. 
Katsuyama made as far as if you could just respond to that I 
want you give you a few minutes.
    Mr. Concannon. Sure, I appreciate that. This notion of 
banning rebates, it lacks understanding of how our market 
works. Really we have--what he fails to mention is that the 
large majority of the, what we call liquidity rebates, go to 
dealers not brokers.
    They actually go to market makers trying to form price in 
our market. These market makers support small companies. They 
support small ETFs, newly issued ETFs that demand that support 
and the large broker dealers.
    Now, I agree that some of the size of the rebate probably 
should be modified as a company becomes more liquid. And this 
is part of the problem with the one-size-fits-all that we 
talked about in the context of Reg NMS.
    While we do regulate this process, and we do attach 
obligations to our market makers to support these stocks in 
return for these rebates, it is a highly regulated part of our 
market.
    Let me continue by saying that when brokers receive 
rebates, they are still subject to best execution. It is 
somewhat insulting to suggest some of the largest brokers in 
our country are not performing their best execution obligations 
because of a conflict of interest.
    There will always be a conflict of interest. We have so 
many different markets to route to and decide about. There are 
going to be conflicts of interest. We can't outlaw them.
    It is really how do they deal with those best execution 
obligations. They have full committees that analyze data. We 
can change price, and we don't see the market react because of 
best execution obligations.
    When you look at where the rebates are flowing, again, 
these are proprietary market makers that are choosing to post 
bids and offers and form price in our market. That is something 
that is not done in IEX.
    IEX is largely a dark pool that wrapped itself in an 
exchange--70 percent of the volume in IEX is dark liquidity. It 
is not a place where market makers want to quote and form price 
to the public markets.
    So it is a different model. It is a model that someone can 
choose to route to. But it is different than a traditional 
exchange that has small companies and small ETF issuers where 
they need market makers and that market maker rebate helps 
support that market maker.
    Mr. Hultgren. That is helpful. Thank you very much.
    I am going to yield to my good friend Ted Budd for the 
remainder of the time then. Hold on.
    Mr. Budd. Thank you to the vice chairman and brief question 
before votes. So Mr. Wittman, so it was 42 years since 1975. 
Should Congress take another look at the regulatory framework 
regarding the equities markets?
    Mr. Wittman. Yes, I think we should. I think we always want 
to make things better, and I think that is why we are here 
today and sharing our views. I think you can't rest. You can't 
be complacent.
    I think we take a look at the areas where there are some 
issues and let us see what we can do to further the 
conversation and make this market better and get the small, 
mid-size companies listing on exchanges again and that capital 
formation that was talked about a few minutes ago.
    Mr. Budd. Thank you.
    I yield back.
    Mr. Hultgren. I will yield the balance of my time to Mr. 
Loudermilk, who has joined us today, so thanks.
    Mr. Loudermilk. Thank you, and thank you Mr. Chairman for 
your indulgence being here today. And I will make this as quick 
as possible and direct my questions to Mr. Farley.
    I understand that your business and some of the other 
businesses represented here today have companies that are 
affiliates, they are affiliated companies that do work that is 
not related to effecting trades on the exchange.
    Can you define what some of those businesses are and the 
challenges that you are facing with the regulatory environment?
    Mr. Farley. Well, actually it is quite broad. We are part 
of a company called Intercontinental Exchange, Inc., which is 
by some metrics the largest exchange operating in the world 
that operates a vast array of businesses from futures trading 
to data products to regulatory compliance products and 
services.
    And so what we do at the New York Stock Exchange is 
incredibly important. But it is only a piece of what the 
overall business does.
    Mr. Loudermilk. And understand that because of the way that 
the code is written now that the SEC is expanding the 
regulatory environment to these businesses that are not 
involved in the actual exchange operations. Is that true?
    Mr. Farley. That is exactly right. And so the SEC can 
determine what is and isn't a facility of the exchange. And 
that basically gives them nexus or a hook for significant 
regulation.
    And we are seeing that expand, expand, expand to the point 
where it no longer covers businesses that are or potentially 
will cover businesses that are not directly responsible for 
reporting or effecting a trade on the exchange. There are 
businesses that are just exogenous to what we do at the NYSE.
    Mr. Loudermilk. And so you see a need to modernize the 
language to clarify the term facility basically?
    Mr. Farley. Yes, I think it would be good for everyone. We 
compete with firms that do not have such regulatory 
obligations, and it doesn't really assist in the regulation of 
the New York Stock Exchange.
    Mr. Loudermilk. And we do have legislation affecting that.
    And so with that, Mr. Chairman, I yield back. Thank you.
    Chairman Huizenga. The gentleman's time has expired. All 
time has expired. So I would like to thank our witnesses for 
being here today. I think already we have gotten reports of 
this being very helpful, very informative. We certainly 
appreciate your time, your effort for being here.
    Without objection I would like to submit the following 
statement for the record, Committee on Capital Markets 
Regulation, the U.S. Equity Markets, a Plan for Regulatory 
Reform.
    Chairman Huizenga. Without objection.
    And without objection all members will have 5 legislative 
days within which to submit additional written questions for 
the witnesses to the chair, which then I will forward those to 
the witnesses for their response.
    I ask our witnesses to please respond in as timely a 
fashion as at all possible. And without objection all members 
will have 5 legislative days within which to submit extraneous 
materials to the chair for inclusion in the record as well.
    And so on behalf of my friends up here, so as you can see 
by the countdown clock we do have votes, but I deeply 
appreciate your flexibility in being here today.
    It has been a extremely illuminating and very helpful, I 
think. And I know that this is hello not goodbye. We are going 
to be continuing to have this conversation and look forward to 
working with all of you.
    The Chair notes that some Members may have additional 
questions for this panel, which they may wish to submit in 
writing. Without objection, the hearing record will remain open 
for 5 legislative days for Members to submit written questions 
to these witnesses and to place their responses in the record. 
Also, without objection, Members will have 5 legislative days 
to submit extraneous materials to the Chair for inclusion in 
the record.
    So with that, our hearing is adjourned.
    [Whereupon, at 1:32 p.m., the subcommittee was adjourned.]

                            A P P E N D I X


                             June 27, 2017
                             
                             
                             
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