Thank you so much, J.W. [Verret] and Ty [Gellasch], for that incredibly kind introduction. It’s a real honor to be here with you both today at George Mason, talking about the only issue you two have ever agreed on.[*] Literally. They say that politics makes for strange bedfellows,[1] and, for reasons that will soon become clear, nowhere is that more true than when it comes to reforming America’s stock markets—so I’m grateful to both of you for your leadership on these issues.

Now, before I begin, let me just give the standard disclaimer: the views I express here are my own and do not reflect the views of the Commission, my fellow Commissioners, or the SEC’s exceptional Staff. And let me add my own standard caveat: I absolutely expect that, in the fullness of time and wisdom, my colleagues will discover that, as usual, I was right.

As my colleagues can tell you, giving policy speeches like this one can be very stressful. Fortunately, before taking this job I had good practice speaking before skeptical audiences ready with hard questions. You see, this year my mother is celebrating her thirtieth year teaching the second grade, and for almost every one of those years I have visited her students, sat on the classroom carpet, and answered any questions her second graders might have about my life.[2] Trust me: once you’ve survived an hour on Mrs. Jackson’s carpet, you’re ready for anything.

One question my mom’s students ask is: What kind of kid were you? And the best way to answer is to tell them a story. When I was growing up, my parents and I lived in a very small apartment in the Bronx. Space was tight, and my parents hated coming home every night to see my toys everywhere. So my father had an idea: my parents would pay me each time I cleaned up my toys. And, sure enough, the next night my father proudly came home to a clean apartment. But the next night my dad returned to an even bigger mess; it was, he said, almost as if I had intentionally spilled my toy box out all over our ever-shrinking living room. I responded that while I didn’t know what he was talking about, I’d be glad to clean up again—for a fee. The same thing happened the next night, and the night after that, until my father finally drew the line. He’s since said that he and my mom knew, right then and there, that I would someday become an excellent investment banker.

What’s the point of this story, other than the obvious fact that ill-behaved children grow up to be SEC Commissioners? It’s that regulators must remember that, as surely as I spilled my toy box all over that tiny apartment, market participants will follow the economic incentives we give them. Given power and a profit motive, even the most storied institutions will do what they must to maximize their wealth. And nowhere has this been more true than in our stock markets.

For over a century, exchanges were collectively owned not-for-profits, overseeing and organizing trading in America’s best-known companies.[3] But about a decade ago, exchanges became private corporations, designed—perhaps even obligated—to maximize profits.[4] Yet we at the SEC have far too often continued to treat the exchanges with the same kid gloves we applied to their not-for-profit ancestors. The result is that, even while one our fundamental mandates is to encourage competition,[5] the SEC has stood on the sidelines while enormous market power has become concentrated in just a few players. That’s a key reason why among our 13 public stock exchanges, 12 are owned by just three corporations.[6] And that’s how the stock exchanges that are a symbol of American capitalism have developed puzzling practices that look nothing like the competitive marketplaces investors deserve.

That’s not to say, of course, that today’s stock markets don’t deliver important benefits. Of course they do: the costs of buying and selling American stocks, and therefore participating in our Nation’s growth, are often a fraction of what they once were.[7] But it’s far from clear whether those developments are attributable to the exchanges’ for-profit status. What is clear is that their profit motive gives exchanges every reason to structure stock markets in a way that maximizes their rents. And every time exchanges raise prices, that money comes out of investors’ pockets, who pay more to buy and sell stocks than they otherwise might. The elaborate stock-market structure we have today isn’t free; American investors are paying for it, one microsecond a time.

In the meantime, we at the SEC have struggled to keep up. Our oversight of the stock markets has drawn understandable criticism from market participants[8] and the federal courts.[9] They wonder why we allow conflicts of interest in this area to persist, and why basic principles of competitive economics don’t govern our review of exchange demands. And so do I.

That’s why I’ve come here today to say that it’s time to put the “exchange” back in the Securities and Exchange Commission. I want to highlight four puzzling practices in today’s markets—the two-tiered system for stock-price information, legal limits on exchange liability when they harm investors, the structure of stock exchanges themselves, and payments exchanges make to brokers who send orders their way—that don’t look like the kind of competition that American investors deserve. And I want to highlight the way forward for us at the SEC.

This is not a partisan issue: Commissioners of all stripes,[10] Members of Congress[11] and our current Chairman[12] have all said it is time for us to take a hard look at the structure of our stock markets. We have a rare bipartisan opportunity to move this forward—and, for reasons I’ll explain, we owe it to American investors to take it.

The State of America’s Stock Exchanges

To the average American investor who relies on our stock markets to fund her retirement, our markets seem simple. She points, clicks, and buys shares. From the investor’s perspective, buying a stock online is not that different from buying books online. But as all of you know too well, what happens next is unlike any other market in America.

The investor’s order goes to a broker, who has to decide whether to keep it, send it to an exchange, or route it to some other platform. Rather than sent to a single, central location, in today’s electronic markets the order is likely to be bounced around data centers across New Jersey at high speeds. None of this is transparent to the ordinary investors our markets are meant to protect, and it’s the kind of complexity that allows a few powerful players to maximize profits. More on that later.

First, one might wonder how our stock markets got here. The answer is that stock exchanges have been better at extracting rents than regulators have been at stopping them. As you all know, in 1934, the Nation struck a bargain with our stock exchanges: the Commission was created to oversee the markets, and in turn the exchanges were given wide latitude in organizing their affairs. For generations, this system served investors well.[13] But then the world changed, and the SEC allowed exchanges to become for-profit corporations with both regulatory and profit-seeking mandates.[14]

At the time, the Commission didn’t sufficiently contemplate the effects that decision might have; we simply said that we saw no reason to think that exchanges couldn’t play the role of regulator and pursue profit at the same time.[15] Maybe we were wrong. Whatever one thinks about the benefits or drawbacks of those events, we should all agree that for-profit companies can be counted on to do one thing: pursue profit.[16] And in for-profit hands, SEC oversight designed for not-for-profit exchanges can be dangerous.

Take, for example, our rules requiring orders to be routed to the exchange that displays the best national best bid or offer.[17] Those rules, of course, help to serve the crucial purpose of ensuring that all investors get the benefit of a competitive national market system. When the SEC enacted these rules, we saw that there would be cases where brokers would be required to send the order to a specific exchange, leaving the broker—and, crucially, their customer—exposed to excessive trading fees on that exchange. So we capped the fees the exchanges can charge.[18] But facing a limit on one kind of fee, exchanges may have simply raised other fees, like the cost of connecting to the exchange. And because our rules require orders to be routed in this way, we risk that the law—rather than market forces—drives the price investors pay to connect.

As we have seen at other times in our nation’s financial history, arming profit-making entities with government protection is a prescription for trouble.[19] And in four ways, doing so in this area has produced markets with a puzzling structure that may not serve investors.

How Modern Stock Markets Tax Ordinary Investors

Let’s start with who decides how ordinary American investors get information on stock prices. In a world where information is power—and where getting it is cheaper and easier than ever before—our system for telling investors what stocks are worth should be straightforward. Instead, we have created a two-tier system of stock-price information—a lower-quality public feed and generally higher-quality private ones.[20] And we allow the exchanges to run both.

In 1975, Congress mandated that a universal, public feed of stock exchange prices be available for purchase by all investors.[21] These prices are the lifeblood of our equity markets, because they tell investors what stocks are worth at any given moment. Investors demand, and the law requires, that they receive the benefit of these prices when they buy and sell stocks.

Importantly, however, the exchanges run the public feed.[22] And, at the same time, the exchanges sell private data feeds. The result has been a public feed that is slower and less robust than the private feeds the exchanges sell.[23] Unsurprisingly, exchanges have underinvested in the public feed—a product they compete with. It’s like letting Barnes & Noble run our public libraries. Nobody should be surprised to find that our libraries don’t have enough books.[24]

Another problem is that treating for-profit exchanges with not-for-profit kid gloves has allowed stock exchanges to operate, in many respects, above the law.[25] Ordinarily, for-profit businesses in America can be sued when they are found responsible for causing harm. Students of law and economics like to say that this helps make sure that firms don’t cause more harm than they should. Holding firms responsible for their actions is one way to make sure that corporations are careful when they expose people to risk.

It’s hard to imagine many businesses that we’d want to hold accountable more than our stock exchanges, where millions of Americans’ retirement and education savings are invested each day. Yet when they are sued, stock exchanges assert that they are immune from liability on the theory that they are acting as regulators rather than profit-makers.[26]

Even where those arguments fail, exchanges can avoid paying for the harm they cause investors by requiring all traders to agree to low liability limits included in the exchange rulebook.[27] Many exchanges set those limits at $6 million or less for claims each year. We at the SEC have approved those rulebooks, leaving investors no recourse when they’re harmed by the exchanges’ decisions. Instead, the investing public is left holding the bag for stock exchanges’ mistakes.

Third, the structure of public markets—fragmented yet actually owned by a few powerful firms—raises questions about whether that design is best for investors.[28] As I mentioned earlier, rather than the centralized exchanges we had in New York for more than a century, we now have 13 stock exchanges—with 12 of the 13 owned by NYSE, NASDAQ, or CBOE. Why do we have so many exchanges, only to have nearly all of them owned by three corporate parents? I understand, of course, why a company would buy and absorb competitors with the same business model. It’s harder to see why a company would acquire, and then continue to operate, virtually identical businesses.

One reason our exchanges do this is so they can charge investors to connect to each exchange.[29] And as I mentioned earlier, we at the SEC have not only failed to stop this practice; our rules encourage it. That, of course, raises the concern that exchanges will charge investors too much to connect, secure in the knowledge that our rules, not market dynamics or the quality of their product, help them keep prices high.[30]

Now, we at the SEC can disapprove proposed price increases for connecting to our stock exchanges. In a world where the costs of electronic connections are constantly falling,[31] exchanges have asked us to raise these prices over and over again during the past three years.[32] Unfortunately, we have stood on the sidelines. In fact, my staff reviewed all ninety-nine times exchanges have recently changed their connectivity practices, and not once—before this week—have we taken action to stop them.[33]

Finally, SEC and FINRA rules for best execution have clearly left open opportunities for conflicts of interest that hurt investors.[34] The reason is that exchanges offer controversial payments—they call them rebates[35]—to brokers based on the volume of customer orders that broker sends to that exchange.[36]

When a broker places an order on behalf of a customer, we expect the broker to send the order to the exchange that is likely to get the best price for their customers. But to nobody’s surprise, research shows that brokers very often send their orders to the exchange that gives the broker the biggest rebate.[37] In the years since this practice was first brought to light, little has been done to bring transparency to the effects of these payments.[38] It’s time for that to change.

The Path Ahead

So our stock markets—a symbol of American capitalism around the world—are taxing American investors with hidden fees and conflicts of interests. What does it say to mom-and-pop investors when our stock markets are full of abuses like these? The good news is that I’m not the only one concerned about these issues. I believe the Commission is finally ready to take off the kid gloves we’ve been using on our stock exchanges—and start to ask hard questions about our country’s stock market structure.

First, this Spring the Commission unanimously proposed a pilot study that will test the effects of rebates on market conditions.[39] My office will work actively with Trading and Markets Director Brett Redfearn to move the pilot forward after a full review of all of the comments that we have received. For example, an especially important aspect of our proposal was to include a “no-rebate” bucket that will allow us—and, more importantly, investors—to observe how markets respond to the absence of rebates.[40] To no one’s surprise, the exchanges have fought mightily against the proposal.[41] For my part, I think the time has come for the SEC and investors to know the facts about rebates and other incentives.

Second, our stock markets would benefit a great deal from greater transparency about how exchanges make their money. In particular, a clear and uniform approach to disclosing revenues across exchanges and over time would go a long way in giving investors a clearer view regarding the costs they pay to invest in America’s public companies.

Third, my office will also work closely with Director Redfearn in connection with the recently announced roundtables regarding equity market structure. My office will be especially focused on the roundtable on market data. It is time for the Commission to have a market-wide conversation about how exchanges make their rules and prices. Exchanges filed more than 1,500 rule-related requests with the SEC in 2017, hundreds related to trading fees, data fees, and order types alone. Each one affects the exchanges’ profits. It is our obligation to ensure that the exchanges’ actions do not unduly burden competition and are fair and reasonable.[42] It’s time for the SEC to get serious about that obligation.

Finally, we should take a hard look at whether it makes sense to allow for-profit exchanges to write the rules of the game for their customers and competitors while also enjoying immunity from civil liability. The exchanges cannot have it both ways—both claiming that business considerations limit the degree to which they can regulate public companies while making broad claims to regulatory immunity.[43] And rulebooks that impose low liability limits even when exchanges are found liable for investor harm also deserve closer scrutiny. We should make sure that our stock exchanges—like all American businesses—are held accountable when they cause harm to the investing public.[44]

* * * *

Stock market structure is confusing, complex and opaque, so it’s worth taking a moment to remember why this work is so important. America’s stock exchanges are a symbol of the Nation’s greatness, home to the deepest and most liquid capital markets the world has ever known. We cannot allow the most free and transparent markets in the world to be characterized by abuses like these. Our markets are a symbol of who we are, and the Nation deserves better.

So do American investors. The ordinary, middle-class Americans who compete every day to create the hard-earned wealth they entrust to our public companies deserve to know that our stock markets are a product of that same kind of competition. Thank you to each one of you for all you have done to help make sure our markets reflect the very best of our Nation. And thank you for all you’ll do over the coming months to make sure we get this right.