Get the Facts: The U.S. Equities Market

A key driver of capital formation and a cornerstone of job creation and economic growth.

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The U.S. equities market is a critical source of financial opportunity and savings.

Over half of all Americans are invested directly or indirectly in the market.

Over the past 20 years, the U.S. equities market has evolved significantly.

The U.S. equities market has improved by multiple measures, from lower transaction costs to greater transparency and stability. By regulatory design, it promotes competition and innovation and provides both retail and institutional investors better outcomes than ever before.

The benefits are far-reaching.

The U.S. equities market is the envy of the world, enabling companies large and small to raise capital, investors to participate in the growth and success of these businesses and institutions to invest on behalf of individuals saving for retirement or education.

The U.S. Equities Market Evolution

Between the 1970s and early 2000s, regulators introduced a series of rules to promote competition among exchanges and a diverse range of new electronic platforms, including alternative trading systems and platforms operated by broker-dealers.

Brokers are legally required to route customer orders to the source of best execution—be it a registered exchange like NYSE or Nasdaq or an alternative platform. These trading venues must innovate and compete for business on the basis of better pricing, service and performance.

That best execution competition benefits all investors.

Trading costs for U.S. equities are lower than in European, Japanese and Chinese equities markets. That’s partly an outcome of competition, as exchanges, market makers and other platforms compete to provide the best service at the lowest price.

It’s also a reflection of the dramatic tightening over the past 20 years of bid-ask spreads—the difference between the best available prices at which shares can be bought and sold. When spreads are wide, the entities responsible for executing trades make more money. When spreads are narrow, investors get a better deal.

Exchanges, market makers and other platforms compete to attract trades by narrowing spreads.

Transparency fosters confidence, and when investors have greater confidence in prices, spreads tend to narrow (thus lowering trading costs) and markets become more stable. That’s been the case in U.S. equities over the past two decades.

One of the bedrock features of the U.S. equities market is its robust public price discovery process, which is itself an outcome of the market’s electronic evolution. Market participants are able to see the value of stocks in real time. They also enjoy immediate visibility into pre-trade quotes and post-trade execution data through the Consolidated Tape, regardless of where the order was executed.

Brokers and other entities are also required to provide extensive disclosure of their execution quality on a monthly basis through Securities and Exchange Commission Rules 605 and 606.

The digital evolution of the equities market—following significant investments by a variety of industry participants, including market makers—has increased trading volume and reduced bid-ask spreads (the difference between the best available prices at which stocks can be bought and sold).

As a result, the market has greater depth, which means that it can absorb relatively large orders without significantly impacting the price of the security.

The market’s resilience was on full display in March 2020, amid the onset of the global pandemic. While other markets seized up under the pressure of surging volume, the U.S. equities market retained its deep liquidity and functioned as intended.

The U.S. equities market functions especially well for individual investors.

Market makers compete for orders from retail brokers like Charles Schwab, Fidelity, Robinhood and TD Ameritrade by offering better execution. They are able to execute these orders at prices that match or often beat the National Best Bid and Offer price (NBBO) listed on exchanges. Last year alone, market makers delivered more than $3 billion in price improvement to retail investors.1

Recent analysis also indicates that publicly reported price improvement may be understated because regulatory disclosures do not account for all order types and sizes. As a result, price improvement could be two or three times the amount currently indicated in public filings.

Retail investors significantly benefit from the enhanced liquidity—or the ease with which securities or other assets can be bought or sold without significantly affecting the market price—that they receive from having orders executed by market makers. In addition, by routing these orders to market makers, brokers also enable retail investors to save exchange fees (fees that exchanges charge investors to trade on their venues).

1 Citadel Securities’ analysis of 605 data.

Frequently Asked Questions

General

Citadel Securities

Price Improvement Has Dramatically Increased

When a market maker beats the best price available on the exchanges, also known as the National Best Bid and Offer price (NBBO), it has provided price improvement. Price improvement has increased dramatically in recent years due to robust competition among market makers, leading to meaningful savings for retail investors.

Market makers now deliver billions of dollars in price improvement to retail investors each year. Last year alone, market makers delivered more than $3 billion in price improvement to retail investors in the equities market.5

5 Citadel Securities’ analysis of 605 data.

Price improvement amounts to a significant savings on a per ticket, or per order, basis and Citadel Securities leads the industry in delivering it.

Citadel Securities’ Recommendations

Citadel Securities has a strong interest in the efficiency and stability of U.S. financial markets. U.S. capital markets work better today for investors than ever before, and we are proud to consistently advocate for measures designed to enhance competition, transparency and resiliency.

 

As the Securities and Exchange Commission reviews financial market regulations, we believe that the preeminent global position of the U.S. capital markets can, and should, be further strengthened.

 

We have provided specific policy recommendations to increase competition, transparency and resiliency in the following important markets:

For Greater Competition:

  1. Increase on-exchange trading and drive better prices by reducing the minimum tick size to a half-penny where appropriate.
  2. Increase on-exchange trading and lower trading costs by reducing the current access fee cap by 50% where appropriate.
  3. Level the competitive playing field by expanding fair access and public display requirements for dark pools.

For Enhanced Transparency:

  1. Ensure effective transparency of PFOF arrangements by comprehensively reviewing the 606 reports being published pursuant to the recently updated rules.
  2. Modernize Rule 605 to provide more refined and detailed price improvement statistics by adopting the recommendations of the Financial Information Forum, including taking order size into account.

For Increased Resiliency:

  1. Unlock capital and operational efficiencies by endorsing and overseeing industry efforts to move to T+1 settlement.
  2. Deliver greater transparency and predictability to market participants regarding CCP margin requirements.

For Greater Transparency:

  1. Deliver greater transparency, fairness and competition by implementing real-time public reporting.
  2. Support efforts to increase the quality and timeliness of U.S. Treasury market data reported to regulators.
  3. Collect data on uncleared bilateral repos.

For Increased Resiliency:

  1. Increase market resiliency and efficiency by transitioning more trading activity in both secondary cash market transactions and bilateral U.S. Treasury repos to central clearing.
  2. Ensure appropriate oversight of multilateral trading venues by finalizing the Regulation ATS proposal and including multilateral RFQ venues in scope.

For Greater Competition:

  1. Deliver greater transparency, fairness and competition by finalizing the SB-SEF rules, including impartial access for all market participants and prohibiting post-trade name give-up.

For Enhanced Transparency:

  1. Increase transparency by setting block trade thresholds and eliminating the 24 hour public reporting delay.

For Increased Resiliency:

  1. Implement straight-through-processing rules that are consistent with CFTC and EU standards.
  2. Adopt a clearing requirement for single-name CDS.
  3. Eliminate the exemption from initial margin requirements for uncleared interdealer transactions.
  4. Ensure appropriate oversight over offshore transactions with a sufficient nexus to the U.S. with respect to public reporting, clearing and trading requirements.

Citadel Securities’ Recommendations

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