OPR and Other Market Structure Hot Buttons for 2026

John Ramsay:
People have had a long concern, very long-term concern, I think as everybody knows, about The Order Protection Rule and whether it was ever necessary, and even if it was, whether it's necessary now.
Peter Haynes:
Welcome to episode 79 of Bid Out, a market structure podcast from North of 49. My name's Peter Haynes, I'm the host of this podcast series, and today I'm bringing back guests, after a recent experiment where I talked to myself for 30 minutes. The experiment was on our last episode, I went solo on a discussion on benchmark topics for 2026, which was okay, but I must admit, I prefer the moderator role much more than content creator. And with that, I'm excited about today's lineup of guests, we've got two content rich guests joining us here today, Matt Kinak, who is head of global trading at T. Rowe, and John Ramsay, who is the chief policy expert at IEX. And John himself co-hosts a market structure podcast with his, I'll call him well-respected IEX colleague and industry funny man.
John Ramsay:
And I might say foul-mouthed colleague, Ronan.
Peter Haynes:
Yes, yes, we would have to change the rating on our podcast if Ronan came on here, so-
John Ramsay:
I've gotten used to that standard, so I will try to keep it clean for this one.
Peter Haynes:
That's okay. But we're all talking about Ronan Ryan who's well known in the industry, and John and Ronan host a really popular podcast by the name of Boxes and Lines, I encourage everyone to listen to it if you are interested in market structure. And if you're listening to this podcast, you're definitely interested in market structure. So, John and Matt, thanks a lot for coming on the show today.
John Ramsay:
Thank you.
Mett Kinak:
Yeah, thanks for having us, Peter.
Peter Haynes:
Okay. John, I'm going to start with you given that you also co-host a podcast. Which role do you prefer being a moderator or being the guest?
John Ramsay:
Well, I don't know. Wait until the end of this one and I'll tell you. I like both, I should say, I trust you as a moderator, Peter, so I think I feel comfortable in this role as well. It's a little easier knowing that you're lobbying the questions rather than having to try to figure out how to phrase the answers, but it's good.
Peter Haynes:
It's a learned skill too, obviously, to run through the series of questions and make sure you bob and weave in the direction the questions go rather than just reading them. But I was thinking before I got on here, I was laughing, you know how every podcast you listen to, the person who's hosting will always say, I've got the best guest possible? You never hear anyone say today, honestly, I have the worst two idiots as my podcast guests, you never hear anyone say that. And I'm not going to say that today.
John Ramsay:
Well, thank God. Yes.
Peter Haynes:
I did get a kick out of that. So, Matt, actually, I know you've been obviously on our podcast a few times, I really appreciate the time that you give to the industry, but you've also been a guest on Boxes and Lines a couple of times. Why don't you tell our listeners about your first experience as a guest on Boxes and Lines?
Mett Kinak:
I was fortunate enough to be one of the early guests on Boxes and Lines, when they first initially launched it, and it was a figurative hot seat, as John knows, because we were in the telephone booth at the time.
John Ramsay:
In the early days of COVID.
Mett Kinak:
Yeah, just before.
John Ramsay:
Well, actually, no, this must have even been pre-COVID because we couldn't do it after. Yeah.
Mett Kinak:
Yeah. Just before COVID, who knows, maybe COVID started from that very hot box that we were in, the three of us were talking. But it was close quarters, it was enjoyable, but it was like being in a sauna and doing... I don't think I've ever done a podcast in a sauna, but that's exactly what it would feel like, I guess, if we had to do one. Yeah, it was an interesting experience, obviously.
John Ramsay:
Yeah, we still have it sitting out there, I don't know, we'll donate it to the Smithsonian at some point or whatever. Because I remember Eric Stockland, who was also one of our guests early on, it was so warm the windows were starting to steam up, and he wrote in his finger, "Save me," on the glass.
Peter Haynes:
Well, Eric's another great market structure person. So, it's a fun community we're in here, and I know we're going to have a lot of laughs here today, along with hopefully getting into some of the important topics that are hot buttons for 2026. The purpose of this discussion initially, and I know it took a little time to get it together, was to review the second of the two round tables that the SEC had hosted on the Order Protection Rule, or Rule 611. And that second round table took place in Austin, Texas in December, and once we get through the OPR discussion, I think there's a few other issues. It's not all about OPR that we want to dig into here as we work our way through 2026.
So, Matt, I'm going to start with you. You participated in both of the SEC round tables, the one that was in Washington in September, and then obviously the one in Austin, Texas in December. And John, you were also with Matt at that second event in Austin. So, starting with you, Matt, why is it so important that the SEC hosts round tables, and what was your biggest surprise coming out of each event?
Mett Kinak:
I was fortunate enough, like I said, to participate in both. I will say the second one when they called, I've always been very happy to join SEC round tables or meetings that they're having, because I'm located in Baltimore, it's an easy trip for me. But on the second one, I probably committed to it before I realized it was in Austin, Texas. And then, when they told me that, I really couldn't get out of it at that point. But it was a great experience, a really well put together event. I will say the picture of us, John, I don't know if you've seen this, but looks like The Last Supper. I've had people-
John Ramsay:
I won't ask you to tell you what role you're assigning to me in that, but-
Mett Kinak:
Well, what's interesting about it is I've had people send me photos of it, saying, "Hey, this looks eerily similar to the photo of you guys at this round table." And I said, "Well, luckily I'm not sitting in the middle." And then when I looked at the photo, I was, and obviously just by random alphabetical last name, but...
John Ramsay:
Yeah, one could say, further inflating your ego.
Mett Kinak:
Not at all.
John Ramsay:
I won't say that.
Mett Kinak:
I will not take that. But anyway, why it's important to host these round tables. So, I was, again, we've been doing this a long time, JR's obviously been at the SEC previously, and he's been involved in market structure. I know Peter, you have as well. I find it's tremendously helpful for the industry when everyone can get together and really talk candidly about the issues that they're dealing with, and the issues that are affecting their businesses. And we had an opportunity to do that in previous administrations, we didn't, fortunately, in the last administration as much, and having that come back... And again, having open forums where people can really candidly say what they're thinking, how they feel something may go if there were significant changes to market structure is really important. Because a lot of times I talk to the sell side, obviously, I talk to my peers on the buy side, I talk to the exchanges.
So, I think I have a pretty good general consensus of what people are thinking, but being in an open forum like that, where folks are going to speak, maybe sometimes protect their own book, which is fine, maybe not, that helps really set the stage for what's impending. So, when you look at 611, for example, it really does give you an idea of where the industry is, who might contest a proposal by the SEC, and who may not, and really what the SEC's thinking in general. And I think the one big takeaway that I had from the first round table that we attended was really appreciating... We knew the SEC wasn't a big fan of 611, but really getting that appreciation of how much the current chair probably dislikes the rule, and the direction of travel that the SEC was going to take was more formalized post that round table than I think a lot of people were expecting.
Peter Haynes:
And so, John, what about you? You've been at the SEC, you've been part of a lot of round tables, what are your thoughts, first of all, about round tables in particular, and then secondly, what was the biggest surprise coming out of these two roundtables on OPR?
John Ramsay:
I thought it was great. In general, I think that with Matt, I think it's really important to do. I know from the staff perspective, having set one of these, tremendous amount of work goes into setting up the agendas for these things, and finding the participants, and that's a big part of the trick, obviously, is you want to have a wide enough spectrum of people that you actually are going to have an exchange of views, and people with different views because otherwise there's not much point. And I do think they succeeded pretty well in that one. I actually love the fact that it was in Austin, just for personal reasons, because I like Austin anyway, and part, I did undergrad, I went to the University of Texas at Austin. I'm probably one of the more fanatical Longhorn fans there are. So, I look for any opportunity to get down there.
And I think it's good for the staff to leave D.C. every once in a while. And so, I thought that was good. In terms of surprises on OPR, no big surprises for me. The biggest surprise, I know you were going to talk a little bit of a surprise, was I know there had been some discussion about, particularly if the SEC makes the decision to repeal the rule, should you still have an access fee cap. And I came in heavily armed to make the case, you absolutely do need an access fee cap regardless of what happens with the rule. And I was worried that I was going to be a lone ranger in that, or in the minority, and one thing that I was pleasantly surprised by, and I think Matt was on the same side of this, is a lot of people agreed with that.
Peter Haynes:
Yeah. But the group that were not in favor of keeping an access fee cap were your peer exchanges. So, why don't you explain to us, John, why the other exchanges were in favor of no access fee cap, and why wasn't there more of a discussion at that second round table as we dug in on things other than 611? Why wasn't there more of a discussion around exchange tiers? As it seems to me, these two issues of access fee caps and exchange tiers go hand in hand.
John Ramsay:
Well, they do. I'm happy to take a stab at that first. I think that IEX has had a long position in critiquing the undue unnecessary complexity of the fee schedule. We are paying rebates now, and we pay them in tiers, although I think still our structure is simpler than that of many exchanges. I think the large exchanges believe there should be no cap because they believe that if their business is not supported with... Let me put it this way. I'm going to try to put it in not a snarky way. I think that most exchanges under the current regulatory structure have innovated primarily by using different pricing mechanisms. And so, they want the maximum flexibility in order to use different pricing means in order to incentivize people to trade there, as opposed to innovate in other kinds of ways. Now, that's not to suggest that they haven't done other things that are innovative too, but I think that's been... Our view is that that has been the dominant mode of innovation.
And so, their thought is... I'm not going to speak for them, but if they don't have whatever support the OPR currently provides their business now, then they want even more flexibility on the fee. And I think our view is the access fee cap is not principally and has never been mainly about supporting the OPR, it's about making sure that displayed prices are useful and accurate reflections of the actual cost to trade. And that principle continues regardless of what happens.
Peter Haynes:
John indicated you were on the same page as him with respect to access fees, I know Brett Redfern was very vocal, former head of trading and markets, who was on the same panel as you guys, about that as well. What's your perspective on maintaining a cap on access fees?
Mett Kinak:
Yeah. So I did, and I do, agree with JR and with others on the panel that we should maintain an access fee cap. So, this is a difficult question because it goes back to... We've been arguing to reduce the access fee cap or to eliminate it for certain securities for probably the better part of 15 years. But again, there's this underlying theme that exists where when we approach market structure and regulatory items in the United States, we do it in a one size fits all approach. So, we either cap every security, whether it's the most highly liquid traded security or the least traded ETF at 30, or we're going to take that all the way down to 10, and say, everyone's capped at 10. I think that's a poor way of doing it, frankly, but that's the way that our regulator feels that they need to address these issues.
So, we've argued the most liquid securities probably should have a much lower access fee cap because the intermediation isn't as required for those names as it would be for others. From that standpoint, I would still argue that there's a cap needed because there's, again, another underlying theme. Why I think we can get rid of OPR in general, by the way, is that best execution still governs the need for people to go and get the best outcome, the best price, however you want to look at it. Because best execution is still going to exist with or without OPR, people will be required to go get best price. Now, maybe T. Rowe's interpretation of [inaudible 00:13:37] doesn't mean best price on every 100 share execution, but it certainly will for some part of the market or some industry members. So, from their perspective, if you didn't have a cap, you can have one of the exchanges charging a significant amount to access liquidity, and if they were the best priced quote for any given security, someone would have to interact with that because they still have an obligation of best execution.
And it's going to be very difficult to explain to your client, I'm not going to interact with that quote because it's expensive for me to interact with that quote. Even though it gives you the best price, it's not going to be aligned with my best interest. And so, I think caps are still important because it's going to put a very difficult conflict of interest between client, the person routing the order, and obviously the venue that's executing the order. So, to alleviate that... And by the way, that was the main premise for why we wanted access fees reduced in the first place 15 years ago. There was always this perception of a conflict of interest that existed when brokers routed orders.
And so, I'm still in favor of reducing it, I would like it reduced for the most highly liquid names, but I do think a cap needs to exist so that it doesn't run rampant and force people, unfortunately, to interact with quotes they wouldn't otherwise want to.
John Ramsay:
I agree with Matt, I think there is certainly in an environment, if the rule were repealed, I think there is ample room for discussion about what the cap or cap should be. I tend to favor a single cap rather than something tiered because it's simpler, but it doesn't have to be 10 mils, it could be something different, it could be 15, it could be... Who knows? But the point is that you need a cap. And I think it's instructive that when all of those amendments, when they were finally adopted... And it's important to remember, they were adopted by a unanimous commission. They were, of course, challenged in court by two of the exchanges. That challenge was rejected unanimously by a DC appeals court panel. So, we've gone through all of this and at some point you have to say that you can't keep re-litigating the same issues over and over again.
Now, I do appreciate that if there's further regulation NMS reform re-raises the question of access fee caps, then you should look at that. But it is important to, in the context of that litigation, everybody, even the challengers acknowledged that the tick size changes, so changing the tick size to half cent and the access fee piece were inextricably linked, that you couldn't change one without considering the impact on the other. So, they agreed with that, and everybody seemed to agree also with the principle that, yeah, you can't really have access fees that are so large that they're more than half of the minimum spread size because that's way too distortive. So, if everybody agrees on that, then I don't see how you get away from the conclusion that you need to have some kind of cap.
Peter Haynes:
So, just before I follow that question up, John, I did want to mention that one of the alternatives, as Matt was talking about the cap and the difficulty of determining what best price is because of the fees that are embedded is to go to a net pricing model, but that net pricing model, if you have a tiered fee structure at the exchanges becomes very, very difficult because the net price-
John Ramsay:
It becomes completely unworkable. There's so many reasons, it's not only that, Peter, but also in order to put that in effect, you would have to be able to price in very narrow price increments, which was an idea that almost everybody rejected when it was proposed before, to price in 10 mil increments or whatever. And it also, as you said, in the pricing structure that we have now, it is virtually, I would say, impractical to be able to reflect in the quote exactly at any moment in time what the net effect of that pricing is. And if you're the taker of liquidity, you're never going to know what the net benefit is to the taker since that may not even be known.
Peter Haynes:
Yeah. Look, these are rabbit holes, I think we all agree, and we got to balance that complexity with practicality. So, John, we were talking there about the access fee cap and you were talking about the litigation. So, November 2026 is when we are supposed to move to a half cent tick increment for something like 1800 securities, and then a 10 mil fee cap across the board. There has been suggestion that... And you mentioned that if NMS changes, maybe the bets are off on that. Can you just walk through how this is going to play out? Could the rule that has already been approved and then litigated in court be tweaked before November to maybe say what Matt was saying, we keep our higher access fees for the wider spread stocks? Could the tweak like that happen without a full rulemaking process, and do you expect it to happen?
John Ramsay:
Matt's shaking his head, so I'm going to agree with him based on the head shake. I think it would be very, very tough, I think, as a practical matter. Having gone through this full rulemaking process that were two years plus whatever it is, all of these issues to argue to death, no way, it's hard for me to see how you can recalibrate that formula without going through further notice and comment rulemaking, which just takes time. It just does. It's hard for me to see how that happens. Now, the SEC could obviously, if it chose to, could extend the compliance state for those changes, that is something other folks in the industry may argue for an extension of both pieces. Not to say as an exchange, we'd like the half cent tick to come into effect because it does give exchanges more flexibility, a better ability to compete.
We're also sensitive, we understand there are people in the industry that are saying, look, we've got volumes, just from a capacity perspective, volumes are much higher than they have been previously, even recently, we have all these changes on odd lots that are coming into effect, there are all of these changes that are happening because of move to 24-hour trading. There's just an awful lot of stuff coming down the pipeline. So, if they want to argue that there needs to be some kind of extension in order to just make sure that people have a fair opportunity to do the work required, that's fine, I just don't think that it should be open-ended extension.
Peter Haynes:
We're watching for this current administration to start dropping some rules, we'll talk about that, rule proposals ear finalize some rule proposals in the near future. Matt, I know there's been a lot of other rules that are in play with the elimination of 611, but really it was access fees and the NBBO that garnered the most attention at the round table, particularly the second round table, when we were digging in. And I would argue that I was left a little bit wanting on the NBBO discussion, and I want to ask you a few follow-up questions.
So, in the current market construct, all of the exchanges, all 18, 19, 20 of them are required to contribute quotes to the security information processor, or SIP, which in turn will then consolidate these quotes and publish the NBBO. In a no OPR world, do you think all exchanges will continue to provide quotes to the SIP? And if the SIP is less valuable, then who will want to continue to pay the current SIP fees for a degraded product?
Mett Kinak:
This is a big rabbit hole, but I'll dive in. And I will say before I start on that, I agree with what JR was saying, I think it's made very difficult for the SEC to rework the tick increment/access fee proposal that's been approved and pending. I am hopeful, and we've had conversations with them to not implement that in November if there are OPR changes coming down the pike as well. And that's just a function of there's too many things, we've argued this with the previous administration when all the rulemaking was happening. When you include too many variables into the equation, it's very difficult to figure out which change is affecting liquidity, where things are trading, what execution looks like. So, one change at a time, the incremental approach has always been something that we've advocated for, and I'll even give you the example of the new round lots.
They've made it more expensive right now for institutions to trade. If OPR were to be eliminated, what would happen? Is there a definition of new round lots at that point because protection doesn't matter? One change enough to kind of measure things, we'd love to see that before we seek tick increments change as well, and see access fees get reduced. By the way, that's a significant change that the industry has really no data around. Half penny increments, fine, some securities be able to handle that very well, some may not. But taking an access fee that's been generally 30 mils and taking it down to 10 is changing the ratio even of spread to access fee. And so, what the impact of that looks like should be studied first before any OPR changes. But if we're going to go ahead with OPR first, then we should definitely hold those off until we can measure things.
John Ramsay:
The only thing that I would differ maybe a little in the direction of that is that my assumption is that further NMS reform, and everybody is whatever it is... Is going to have multiple elements, as you said. So, it's not only what happens to rule 611? What happens to access fees? What happens to locked and crossed market requirements? What happens to best execution? How do you now define the national best bid and offer and how does that... It is a horrifically complex... It's going to take a long time to pour through all of those issues and get something adopted and actually implemented.
So, my concern is if that's a potentially two-year process and it clearly could be, I don't like the idea of just sticking with the status quo when you already have adopted amendments for all of that period, that again, have been all the way through the process, litigated to death and a decision out on the other side. I just don't know how, as a matter of institutional integrity, one can defend that.
Peter Haynes:
I do want to argue, Matt, that Canada did go from 30 to 17 on non-interlisted names with zero impact. So, I don't ever want to compare Canada to the US because it's unfair, they're different markets, but there is a little precedent there. But getting back to the NBBO, this was sort of, to me, the question was, what's the relevance of the NBBO, who contributes to it?
Mett Kinak:
There's a lot of folks probably now that think that the NBBO isn't necessarily something that's representative of institutional demand anyway. We're currently looking at an NBBO that's derived of new round lots that aren't even 100 shares, if the new proposals get implemented in November, maybe at half penny increments. So, when you're looking at a security that's trading 40 by 50 shares on a half penny increment, and you're trying to trade a million shares, you're sitting and thinking, how relevant is this price? Now, the one thing I will say that's really beneficial for the US is the consolidated tape and the last sale information that we get, because that helps with price discovery just as much as the NBBO does, because you can see where natural supply and demand exists and sizes that get traded, which is a little bit more informative than just seeing, like I said, a 40 share price on the screen.
By the way, when we talk about OPR reform, there's always that suggestion to go to a 1% or 2% market threshold in order to get protection. I don't love that idea from a protection standpoint, what I would argue though is making exchanges with market share still have to provide quotes to the SIP, they would then derive SIP revenue, obviously, and so it would be beneficial for them from that perspective. It would retain somewhat of that north star that the NBBO is sometimes referred to as, even though, like I said, it might be watered down for institutional purposes.
But that north star would still exist, and it would exist more relevantly, frankly, for exchanges that have market share. Having another onslaught of five or 10 new exchanges come on in the next decade, that had very meaningless market share contributing to a SIP with quotes that may either be, A, not accessible or not relevant really doesn't make sense to me. But if you had that market share threshold which allowed you to contribute to the SIP, I think that would make sense.
John Ramsay:
Yeah. And I think it also was striking to me that there seemed to be a consensus at the Austin [inaudible 00:26:45] too about the importance regardless of what happens to the rule of maintaining a measure of national best bid and offer that is a common measure that everybody to... Or to phrase it a different way, the question of whether the rules should mandate price as the predominant measure for how orders should compete and interact with each other is one question, but it doesn't eliminate the need to have a clear measure of what is the best price at any one moment for all kinds of purposes. Again, somebody in Matt's position may rely on that less than some other folks.
Certainly matters a hell of a lot to retail investors, matters for purposes of measuring levels of price improvement, it matters for purposes of constructing indexes, and figuring mutual fund prices at the end of the day, all kinds of things. I think everybody agrees that that is really important to preserve.
Peter Haynes:
Does the SIP become less valuable in a no OPR world? Do you guys agree with that notion? And why would retail that's currently paying people that are subscribing to the SIP and paying the fees per month, what about the alternatives like NASDAQ Basic and things like that, and people just saying, you know what? I don't need the SIP anymore because I can find another source for that, and I'm just going to route in a manner that I think is best. Can you see a world where the number of subscribers to the SIP goes down and these proprietary products become more popular? John, I'll point that one to you.
John Ramsay:
My inclination is to say no, I don't think. I agree with Matt, I think that the establishment of a consolidated tape way back... And remember, this is ancient history now, way before anybody thought about [inaudible 00:28:33] MS, was really a seminal event and a huge leap forward in terms of the quality and level of transparency of markets in this country. And Europeans are still trying to catch up on that, and they haven't figured out a solution to it yet. So, I think it is important, I think the SIPS will continue to be important. There is, it's important to remember also that that consolidated process is also being modernized, there is a defined track to create a new governance structure where you will have a different fee schedule, and that's being worked out now.
I still think that for many purposes, and again, and this is still the SEC long time ago, to the point of how long it takes to implement some of these things, we are supposed to be moving to a point of having competing consolidators so that there can be, more market forces can operate better in terms of the distribution of SIP data. But I tend to think that there are still enough people out there that particularly if the data can be delivered quickly enough on a competitive basis, it will still be highly relevant and necessary.
Peter Haynes:
So, John, you mentioned the new SIP fee structure, I want to complicate that a little bit because we know the fee structure today. A lot of comments at OPR were around the SIP fee structure, and the fact that quotes are equal to trades and we need to more reward trades, particularly on exchanges. But nonetheless, Matt, when you think about a no OPR world, what is the difference between an exchange and an ATS in this new world? And do you see the prospect for ATS quotes from smart markets like Intelligent Cross and elsewhere lighting up and becoming part of the NBBO? And arguably, if they're contributing to the price discovery, then maybe they should be also participating in SIP revenues. How do you see that playing out?
Mett Kinak:
That's why I was pushing, Peter, for having market share thresholds. What I'd hate to see is everyone that wants to light up a quote can just send a quoting to some kind of aggregation and be included in that. It requires folks to potentially connect to places that they wouldn't otherwise want to connect to. I think if you have market share, most likely people are already connected to you because there's fear of missing liquidity. So, I think if we can institute a market share threshold where those firms that exceed that, and want to maintain... And again, you can do this by choice. If you want to maintain the ability to put quotes out there visibly for people to interact with, you can be part of the SIP, people will obviously connect to you because they're not required, but most likely they'll get there because there's ample liquidity or some liquidity to interact with, but it also gives you the choice not to do that.
So, if you find a model where you don't want to be part of the SIP, you can choose not to be. And so, if for some reason it behooves you to put some kind of mechanism in place that you feel is better off not being immediately accessible or being price time priority or other mechanisms that might preclude you from being in what we consider traditional queue management, then that's okay. You have the choice to do that, and you can decide not to be part of that SIP. So, if it's Intelligent Cross and they have a lit quote, obviously, and they meet the market share thresholds, and they want to be included in that to derive revenue and have people obviously engage with them, I'm okay with that.
What I'm not okay with is obviously having everybody, including small firms. And this goes back to, by the way, the question around OPR, where people say, if OPR is eliminated, will we see less venues? And there's obviously one school of thought that says yes, and the other school of though that says, I think we're going to have more venues. And it's possibility if we don't put restrictions on who is allowed to do what, meaning if you don't have that market share threshold, yeah, could you have the 20 or so ATS' currently just light up a quote and say, well, guess what? I've now got a lit quote as well, come interact with it if you want. You don't have to because there's no OPR, but what does that put pressure on people from a best execution perspective? And I think that's one of the things we're trying to avoid.
John Ramsay:
Yeah. And that certainly would be an unintended and a bad consequence, and I think we agree on that as well. I don't have any sense that anybody at the SEC believes that it would be either an intended or appropriate outcome of all of this reform, whatever it is, to mean that people just spin out a lot more ATS' and then the question of, what is the best price becomes more and more muddled. That cannot be the objective. And there needs to be, I think, the commission needs to make sure that there continues to be enough incentive for people to register as an exchange. Again, alternative trading systems serve an important purpose, they provide a lot of optionality for firms like Matt's, and a lot of others, that they have an important role to play.
Exchanges also have a critical role to play in a way that I think of as kind of like serving the function of a public square, where you know everybody has fair access, and you know that orders are interacting in a way that is highly transparent and understandable, and you can't put up a quote and say, we're not going to tell you how it's derived because it's done by AI, and it's just... Yeah, that's all we need to say. There need to be comparable standards in terms of how those things are done, and there has to be enough reason to exist as an exchange. It can't just be, well, we get some protection from liability if people sue us. I think that's something that the SEC hopefully is looking at.
Peter Haynes:
It feels like the lines are blurring though, especially as we move, and we'll talk about ATS' and tokens and things like that in a little while here. But it definitely feels like those lines are blurring. John, I'm not sure if there's going to be a material difference between an exchange and an ATS in the long run other than maybe listings.
John Ramsay:
Well, there better be, just in terms of incentives, because then I think you undermine many of the purposes and protections for which the Exchange Act imposes all of these obligations.
Peter Haynes:
So, exchanges are already trying to segment order flow, they're already trying to... There's retail programs on exchange. I just feel like they're going to keep pushing the envelope more and more in that direction, but this is going to be a very interesting debate. Matt, you've introduced a new aspect of this that I wasn't thinking about regarding thresholds, because historically we think of thresholds on OPR, whether or not an order is protected, but now you've moved the threshold discussion to whether or not you can contribute to the NBBO. And I think that's an interesting pivot in terms of the definition of thresholds, which we have here in Canada.
But again, I think where the pushback will come there, and I hate this, is this idea of a marketplace will say, well, I'm 10% of this particular ETF, so what's the definition of the threshold in terms of having your quotes lit on the NBBO? But again, this is early days on these debates. So, I'm going to try and put us into a bucket here, and then ask you guys a question-
John Ramsay:
Hey, before you do that, Peter, while I'm thinking about it, I was just going to go one step further on the SIP contribution, and just suggest, I think part of the regulatory subsidy that new exchanges get, that is not really justifiable, is the market data revenue distribution. I don't think, I'm not the first person to make the suggestion, but I think independent of what happens with Rule 611, you can make a case for saying you don't get to participate in or receive distributions from SIP revenue unless you exceed some reasonable threshold in terms of...
Because we've had examples now for, and we're trying to get a fix for this for the new plan, I think there should be a fix for the current, where you have a small number of exchanges that are receiving these huge windfall profits basically because they're getting lit up with quotes that virtually never get accessed. And I'm assuming they don't have any expectation perhaps that they will get access, but the way the formula is done currently, and that just doesn't make any sense.
Peter Haynes:
That's why the formula needs to change because it's quotes and not trades. And as you say that these are quotes that aren't going to trade and they're getting revenue and this doesn't make any sense. Okay. So, let's get to my question here. If you assume access fee caps stay at some level that's under 30 or below and then eventually get lowered in November, how many exchange medallions will be left operating when the dust settles? John, I'll start with you.
John Ramsay:
I honestly don't have any idea. I don't know. One question would be is, do existing exchanges get some kind of grandfather treatment or is it only going forward? If that's not the case, I would have to think that there would be some consolidation. But it's hard for me to know how much. I don't think you wind up with five or six or seven, but I think there would be, over time, some consolidation because I think it's just, there are a lot of costs to operating an exchange. There's the subsidy, but you got the CAT costs, and you've got all of the other reg SCI and oversight costs, et cetera.
Peter Haynes:
Matt?
Mett Kinak:
So, assuming Texas comes live before the changes in November, that'll put us at 18, I believe, exchanges. If you're just asking the question of the November implementation of a reduced access fee, we still have 18, I don't think that changes at all. Access fees will not diminish the number of exchanges that'll be out there.
Peter Haynes:
Sorry, I should have added to that that there's no OPR in this new world.
Mett Kinak:
All right. So, without OPR, I would still say, this is going to shock most people, as I've said this before, nothing changes when you remove OPR initially. It's going to take time, because it's going to take time for brokers to determine where they are and aren't getting outcomes for institutions, where they're still obligated to go because there's liquidity there, and they have to interact with it, what their best execution rules look like. So, from that perspective, again, it's 18, but I will say this, if you can construct it in a way... So, remember, exchanges aren't just deriving revenue from access fees or the regulatory subsidy that John referenced, they're deriving revenue from connectivity, they're deriving revenue from the SIP formula. So, if you can say, hey, look, you're not part of the SIP formula if you don't reach a market share, that will help with consolidation because that's a large piece of that pie that they would no longer have access to.
And then, the next thing would be connectivity. That's going to take time because like I said, brokers will eventually determine, hey, I don't need to go to this exchange because they only represent whatever it is, 10 basis points of total market volume, I'm not really getting tremendous outcomes from there. I'm going to go ahead and talk to the institutional community that I represent, tell them I'm not going to go there anymore, it'll probably be supported by data. But again, that takes time for that to derive that information and have those conversations. So, in November of 2026, 18, and hopefully if they were to put some thresholds in, if OPR is completely eliminated by November of 2027, I'm hoping it's lower than 18.
John Ramsay:
And that assumes that everything is implemented before November of 2027-
Mett Kinak:
100%.
John Ramsay:
And that feels to me like a [inaudible 00:40:22]. .
Peter Haynes:
Yeah, John, I understand this, we're living in a perfect world here. I'm just trying to get a sense of direction of travel here. And I definitely agree, Matt, we need a lot of things to happen in order, and John's right, status quo, why would things change? Okay. So, John, there was a school of though amongst some market structure nerds, that part of the SEC's motivation for eliminating OPR was to enable DeFi markets operating outside the traditional financial gates, would be able to trade equity tokens without any rules that would require connectivity to the NBBO or the OPR rule. Do you think this played a part in the SEC's thinking about getting rid of OPR, and what vision do you have about how DeFi and TradFi will fuse together when it comes to trading equities?
John Ramsay:
That's a great question, Peter, now. So, we've got another hour and a half, hopefully, to pose through that... God, Jesus, talk about a loaded question. Number one, I'm not going to purport to know what the SEC's thinking or motivation is around anything, but I do not believe that... Look, Chairman Atkins and Commissioner Peirce, to name two, among other people, have had a long concern, very long-term concern, I think, as everybody knows, about the order protection rule and whether it was ever necessary, and even if it was whether it's necessary now, I think that's the primary driver around... I mean, I think there could be people in the crypto community that sort of feel like this is a significant block for their ability to, if they think that, I think they're probably mistaken about that.
So,, no, I don't have any reason to think that that is the primary reason for considering the reg NMS reform, I think that would be happening anyway. I think the DeFi issues, again, we'd have to schedule a whole nother podcast to sort of talk through those. I think that there are horrifically complicated questions about how you trade securities on an autonomous DeFi platform, and try to replicate all of the key investor protections, transparency guarantees, and everything else that exists in the current structure. I'm just going to say, I feel like we would need to have another very long discussion.
Peter Haynes:
Yeah, we did have a two-part podcast with Brett Redfern on tokenization, and even coming out of that podcast, and Brett knows as much about this as anyone else in the world, there's still a lot of open questions. And I think we're all kind of learning here. It seems like the DeFi world though doesn't want any rules, so it's going to be a tricky combination for the commission to manage. So, Matt, speaking of rules, do you have a sense of when we're going to get an OPR rule proposal, and in term would give that sandbox relief that we keep hearing about for decentralized financial marketplaces to experiment with equity tokenization?
Mett Kinak:
My comments would just be a guess like anyone else's, but we've heard April or August of this year. We are expecting something obviously quickly. What you're seeing on the DeFi side of things is how quickly the SEC is accelerating or looking for innovation in that space. And JR's right, this would take another hour and a half to talk about tokenization. But really quickly, I'll just make one comment. I think from a business perspective, people are looking at it and saying, how do we implement DeFi into the TradFi that exists currently? And I think what the regulator is looking at is how do you take traditional finance and implement it into a DeFi structure moving forward?
And I think those things are disconnected obviously from how the business folks are looking at it versus how the regulator is approaching it, and I think that where that intersects will be interesting, we are anticipating some kind of OPR proposal, like I said, somewhere between the bid being April and the ask being August.
Peter Haynes:
And what about exemptive relief for the sandbox that Chair Atkins talks about?
Mett Kinak:
That's happening a lot quicker than I think people have anticipated, and I think obviously Chair Atkins and Commissioner Peirce gave a speech a month ago in Denver. And coming out of that speech, I think people were surprised at the pace, that they're looking for either innovation exemptions... That's a phrase that most people have never heard of before, especially from a regulatory perspective. So, that'll be something to really keep on the radar for a lot of people because I can't emphasize this enough, this is going to move a lot faster than what we have been accustomed to in the past. We can sit here and say, well, OPR reform would take multiple years to even obviously get proposed, probably get litigated, and whether or not it gets upheld and implemented, it would take three to four years.
I think the current commission is looking at it and saying with DeFi, with exemptions, with the need to push that forward, things are going to happen a lot quicker in a non-traditional way than we're accustomed to. So, it'll be interesting to see how quickly it moves.
John Ramsay:
And clearly, I think the key point here is there's so many unanswered questions when you talk about targeted exemptions, so many questions around what kind of securities are you talking about? Are you talking about stuff that is only initiated by an issuer? Are you talking about NMS securities? Are you talking about other privately traded securities? What timeframe are you talking about? What exactly kind of platform are you talking about? What are all of the other restrictions that would be framed around it? Nobody has any clear clue at this point about how those questions would be answered. There are folks in the, I hate the term TradFi, but in the established securities community, that I think have signaled pretty overtly to the SEC, if you put out a really broad-based exemption, and again, you can debate what that means, and don't put it out for notice and comment first.
So, something that really could have significant impacts on the existing trading ecosystem, and you don't put it out for notice and comment, we think that's number one, beyond your authority, and number two, we'll draw a lawsuit. So, all of these things are unsettled at this point.
Mett Kinak:
Peter, I would just add what JR is referring to is obviously things from an innovation or proposal perspective that impact trading. You can see the pace of the SEC providing exemptive relief for things that are not necessarily directly related to trading, like the DTCC exemptive relief, to say, go ahead from a settlement perspective, go do what you need to do, because they're not going to get as much pushback from that arena. But when it comes to actual execution, new venues, trading and trade relating matters, I think they have to, as much as they want to move quickly, they have to obviously be cognizant of what's happening in traditional finance, and give those participants an opportunity to opine on changes.
John Ramsay:
Yeah. And it also feels like the near term benefits of that kind of innovation, if you will, of giving people the option to have their individual securities held in a wallet on a blockchain, if they choose to, it's easier to explain the clear benefits from that, I think. And it doesn't mean that there's not complexities involved with those, but at least it's easier for me to get my arms around how do you figure out the answers to those questions and get to the end zone.
Peter Haynes:
We have a large IPO coming here in a couple of months, and it would be interesting if the issuer were to decide that they want to have parallel tracks with respect to the issue, and potentially launch native tokens as part of that IPO, that would definitely be a game on, even though the questions around how they would trade, how they would interact with the traditional market are unanswered, it wouldn't surprise some participants to think that that be the direction that more eclectic issuers that are out there that might consider going forward.
So, Matt, speaking of the TradFi world, trying to understand the future trading environment that we're going to live in, the New York Stock Exchange recently announced that they planned to create an ATS for trading tokens, I'm not sure I understand how, and what do you make of that announcement, and secondly, I'm not really sure I understand how can an exchange own an ATS?
Mett Kinak:
Yeah, there's still a lot of details that we need to work out. Obviously, the proposal that NYSE put out there didn't have as much information, I know Michael Blaugrund did a podcast shortly after that, giving a little bit more details and providing a little bit more information, but still lacking for firms like us to fully appreciate and understand all the complexities that are associated with what they're trying to do. One of those, which is, I know Michael said on his podcast that they don't really need regulatory relief to do what they're looking to do, or didn't require significant regulatory relief.
Which had me scratching my head a little bit because we've always lived in a world where exchanges traditionally couldn't own an ATS, and if they did, there'd have to be significant separation of duties between the exchange and the ATS itself. So, that might be the angle that ICE is taking with this launch, it'd be good to understand and appreciate what is and isn't going to be allowable going forward.
John Ramsay:
And it's not clear to me what this thing is going to be trading either, even really. What the nature of the tokens are that they're going to be trading.
Mett Kinak:
Yeah, whether they're native, whether they're ADR form, whether it's some kind of synthetic product that they have out there that listed, we need more clarification now. We also need clarification on the custody and settlement part of it. Are they using a chain that's very specific to ICE, and to this new platform? Is it a multipurpose chain that others can access easily? We don't have a lot of that information, so the details will be interesting as that develops.
John Ramsay:
And I would say that there is probably room for the SEC to provide more... As Matt accurately says, I think there is that the traditional SEC position has been that the exchange companies either can't own ATS' or only with a very limited strict set of conditions. So, there's an existing example with [inaudible 00:50:46] that owns bids. But I think that, and I don't want to nerd out too much on this, the ultimate legal question is, is the ATS, from a legal perspective, acting as a facility of the exchange? And so, that's kind of what the SEC has.
I think that there's a good case to be made for saying that exchange companies ought to be able to own or affiliate with an ATS if it is essentially owned and operated as a separate business, and then the question is, what kind of overlap can you have? And so, there may be some room for some movement there.
Mett Kinak:
From an institutional perspective, if NYSE does launch this new ATS, a lot of people will point and say, well, you don't have to connect to it, obviously, there's no regulatory reason for you to interact with it. And so, if you're not comfortable trading in a tokenized fashion, you should just ignore it. But I would disagree with that notion and say that we have a fiduciary responsibility of getting best outcomes for our clients, and so if this does grow and scale, and there is an opportunity to interact with something that does give the best outcome to our clients, then we're almost obligated to do it.
And it goes back to even the conversation around 235 and traditional equities and expanding the trading hours. Most people say, well, just ignore it. There's not going to be ample liquidity for institutions, but what if there is? What if there is those idiosyncratic events, the news flow that comes out overnight, specific stocks that are reacting to things? We still have that obligation from a client perspective to go and seek best outcomes. And if it is determined that trading at 2:00 AM in that scenario, where something's moving based on news, is the best outcome, then we still have to figure out a way to be connected, to have access to that, and to be able to engage with it. And that's why there's so much pushback sometimes, that there's this perception, you could just ignore these things, they're just happening perfectly around you, but that's not really the case.
Peter Haynes:
You're not going to make a lot of friends in the institutional community when you take the view that you're going to have to follow the market rather than just ignore it. So, what I've learned today, guys, I must admit was a surprise to me, was there's more uncertainty about the future landscape between Matt and John, two of the most respected market structure experts in the world and tuned in, both with the commission and globally, and with the sell side community, I can't believe how little we really understand about what's going to happen going forward, and what the go forward market structure's going to look like, both with respect to how to deal with OPR, and then secondly, as we talked about 24-hour trading a little bit, and then also the move to tokenization. We just don't know.
And yet you have a commission and a crypto community that wants this to happen really fast and maybe isn't as concerned about breaking things. Not the commission, they care about that, but obviously the DeFi world doesn't care as much about breaking things. And we've got a lot to protect here because the US capital markets are the envy of the world and we want to make sure we keep that.
John Ramsay:
But I think with the uncertainty, I will make the point, I think there will be, I think, still ample opportunity for vigorous debate, and for people to speak out on this. And shout out to Matt, I think he has always been somebody in the buy side community who's been willing to speak out. I wish there were more who did that, because I think the comments of institutional investors I know from having been at the SEC are closely listened to. So, it does matter when people are willing to say what they think.
Mett Kinak:
Yeah, thank you, JR. I agree with you 1000% on that one. I encourage all of my peers to opine as much as possible. A lot of times we end up from an institutional perspective playing defensive to all these proposals, and then I think it requires us to be more on the offensive, and be more proactive in getting our agendas looked at because we still represent such a significant portion of equity markets and that shouldn't be overlooked.
Peter Haynes:
And John, I want to ask one more question. It's unrelated here, but it's an area that I think you understand better than any of us. And that is how prediction markets have become part of the day-to-day activities that we keep talking about. We wrote a report this week about the S&P 500 upcoming changes, and there's now a prediction market on what the next name is to be added to the S&P 500. So, there's definitely an intersection with what's going on in capital markets, but it's also political issues, it's geopolitical issues, and we've seen a few recently, headlines.
Bloomberg had a headline this week saying chaotic prediction markets need to be reigned in. With your understanding of the relationship between the CFTC and SEC, and the fact that the CFTC's granted jurisdiction over these prediction markets, what comfort can you give to listeners that even if there's a few things going on that are perceived to be a bit shady right now, that they'll get reigned in and there'll be proper oversight of prediction markets?
John Ramsay:
I thought we were trying to cut this off, Peter. I don't know, I can't figure out. Number one, as an exit... I've worked at both agencies, I've worked everywhere. I have worked at the SEC and the CFTC. I am in favor of merger of the agencies, I think it does not make any sense given current markets that we have the bifurcation that we have. I have no optimism at all that that will happen in my lifetime. In terms of the growth of prediction markets, I don't know, probably somebody is thinking of a contract on the next Boxes and Lines episode, how many F bombs are we going to drop? I don't know. What separates legitimate things that can be characterized as futures contracts from just out-and-out gambling? I don't know. I can't offhand come up with it at a ready articulation.
I think those are important policy questions, I think there are reasonable questions about the current scope scale of the CFTC's ability to thoroughly surveil all of that, and understand what's going on, and make all the necessary policy decisions around it. And there's pending litigation. Awful lot of states have individual state laws around gaming and gambling, and the question is, do those laws continue to have any real meaning? Do states have the ability to regulate that individually or not? We'll just have to stay tuned.
Peter Haynes:
I don't think people fully understand how much smaller the CFTC is than the SEC, it's like 1/10th the size in terms of the number of employees or something like that.
John Ramsay:
And again, I don't mean to connote any disrespect to the employees who are there, there's a lot of great public servants who work there. It's just that structurally, I believe that it makes sense for these integrated financial markets to be regulated in a way that is as coherent as possible.
Peter Haynes:
Yeah. No, I think we all agree with that. Well, gentlemen, thank you very, very much today, we learned a lot as listeners here, and hopefully this is helping to contribute to the overall discussions that we're having in this community. And as both John and Matt said, make sure your voice is heard. If you're in the institutional community, for that matter, if you're a retailer, you're an issuer, you're an interested participant in markets, we want to hear all the opinions so that the most informed decisions are made by our regulators. So, thanks for coming on, Matt, for being a return visitor, John, for your first visit on our podcast, and continued best success with the podcast that you and Ronan run. Thanks very much.
John Ramsay:
Thank you.
Mett Kinak:
Thanks, Peter.