Nearly four years ago, Jen Psaki was freshly in her White House press secretary job when she had to answer questions about the GameStop fallout from the podium.[1] A few months later, my first testimony as SEC Chair was centered on those events.[2] (As is customary, I’d like to note that my views are my own as Chair of the Securities and Exchange Commission, and I am not speaking on behalf of my fellow Commissioners or the staff.)

What GameStop put on display was how much has changed—in technology and business models—since 2005 when we last comprehensively updated our equity market rules.

The markets have moved to overwhelmingly trade electronically, with transaction volume in listed equities tripling in the last 17 years.[3]

A large and growing portion of the market is being transacted off-exchange in the dark markets. As of 2023, approximately 45 percent of share volume was executed in the dark markets,[4] up from 25 percent in 2009.[5]

Further, there has been a significant increase in everyday investor participation in the markets. About 58 percent of American households directly or indirectly own stocks.[6]

The $55 trillion U.S. equity markets are critical to American families saving for their future. They are critical to capital formation, job creation, innovation, and the overall economy. We have the deepest, most liquid markets in the world. I’d note for comparison purposes, our markets have individual stocks whose market cap is greater than the aggregate market cap of many of the leading economies in Europe.[7]

We cannot, though, take our capital market leadership for granted. As I’m sure the athletes who competed in Paris would agree, even a gold medalist must keep training.

We at the SEC have a duty to investors and issuers alike to regularly update our rules to drive greater efficiency and resiliency in the markets—to continue to look for ways to lower cost and lower risk.

That is in essence what SEC staff said three years ago when they issued the GameStop Report.[8] That report identified four areas for the Commission’s consideration for possible reforms.[9]

So, where are we today? Let’s start with equity market structure, and then I will discuss where we are on central clearing, short selling, and digital engagement practices.

Equity Market Structure

Last month, the Commission unanimously approved the most important updates to the equity markets since 2005.[10] Earlier this year, the Commission also unanimously adopted final rules to enhance disclosure requirements for order execution quality.[11]

These rules will help drive greater efficiency, competition, and fairness.

When I started on Wall Street, markets were quoted in fractions of dollars as they had been all the way back to the 18th century. By the 1990s, though stock exchanges had shifted their rules to allow quotes in sixteenths of a dollar, investors were clamoring for lower quote increments. Such wide spreads may have benefited brokers and dealers, but investors benefit when quoted spreads are tighter.

Thus, in 2000, the SEC required the exchanges to move to decimalization.[12] Market participants would be allowed to decide a minimum quote as long as it was in decimals. Ken, you may recall from your early days in Congress the Common Cents Stock Pricing Act of 1997.[13] I know, though, that same year you were pretty busy with the Balanced Budget Act.

Later, in 2004, when proposing equity market reforms, the SEC observed that while the benefits justified decimal pricing, there were potential costs when some market participants use de minimis quotes. Thus, Regulation NMS, adopted in 2005, included the so-called “sub-penny rule” setting a minimum quotation increment of one penny.

Given how much has changed since 2005, I think it was incumbent upon us to update our national market system rules.

First, it was time to relax that one-penny minimum quotation increment, which had become outdated and too wide for many stocks in today’s markets. Stocks representing approximately 74 percent of share volume are currently being quoted at less than 1.5 pennies. This compares to 2005 when 54 percent of stocks traded at less than 1.5 pennies.[14]

For many stocks, under the updated rule, the new minimum will be half a penny. Reducing what’s known as the “tick size” will benefit investors and market participants by allowing stocks to be priced more efficiently and competitively.

Second, over the years, the Commission has received many requests to lower the cap that exchanges could charge for access to both address market distortions and reflect changes in the market since 2005.[15] In light of relaxing the minimum for quoting increments, it also was appropriate at this time to lower the maximum fee that can be charged for access. The Commission’s updated rule lowers the cap from three-tenths of a penny to one-tenth of a penny. It also ensures that traders can determine, at the time of executing a trade, any rebates of the access fee that may be paid to them on that trade.

Third, the rules implement an updated definition of a round lot, which had been 120 years old, to be tiered depending upon the price of a share. This matters because, under current rules, only trades in round lots are covered by the Order Protection Rule.[16] Further, it will bring more round lot quotes into the important measuring stick, the National Best Bid and Offer, leading investors potentially to benefit from better pricing. At 100 shares, it no longer reflected today’s markets, particularly given the high prices at which many stocks trade. The updated rules also will provide investors greater transparency on quotes for orders smaller than a round lot (so-called “odd lots”).

Regarding disclosure of order execution quality, this past March the Commission updated a 24-year-old rule.[17] Rule 605, which the Commission first adopted in 2000, required monthly disclosures on execution quality from market participants known as market centers.

The updates to Rule 605 require that large broker-dealers—those with more than 100,000 customers—disclose execution quality to the public. Along with enhancements to both data and readability, these reforms will improve transparency for execution quality and facilitate investors’ ability to compare brokers, thereby enhancing competition in our markets.

The Commission also has proposed rules regarding best execution,[18] order competition,[19] and exchanges’ volume-based transaction rebates and fees.[20]

We’ve received a lot of feedback on these proposals and are considering all of the comments.

Clearing

GameStop was a real-world example that the market plumbing of clearing and settling transactions matters.

Rapidly changing prices led a number of brokers to restrict additional buying activity by their customers due to the clearinghouse making larger than usual margin calls. Many everyday investors lost access to the market at a critical time.

The longer it takes for a trade to settle—the slower the plumbing—the more risk our markets assume and the more risk fundamentally that we all assume.

As a result of these events, market participants of all stripes called for shortening the settlement cycle.[21]

On May 28, 2024, we achieved this. The equities, corporate bonds, and municipal markets successfully moved to T+1 (aligning with the Treasury markets, which had already been at T+1). Further, market participants are now required to confirm, affirm, and allocate their trades as soon as technologically practicable on the same day as the trade.

Market participants, including many of you in this room—from the clearinghouses, depositories, custodian banks, broker-dealers, investment advisers, self-regulatory organizations, stock exchanges, service providers, and industry groups—worked, along with SEC staff, to make the transition happen smoothly.

For everyday investors, this means you now can sell your stock on a Monday and get your cash on a Tuesday. This makes a real difference—you don’t have to wait until Wednesday. With 58 percent of American households holding stocks, this is significant.

Cutting the clearance and settlement cycle in half also reduces the amount of margin, or collateral, that must be placed with the clearinghouse. The way the math works it’s likely to average 29 percent savings over time. First indications reported by the clearinghouse show a savings of 23 percent, or about $3 billion, resulting from the move to T+1.[22]

Shortening the matching process of clearing (the time to ensure that all parties confirm, affirm, and allocate the trade details) also lowers operational as well as counterparty risk.

Since implementation, market participants have been affirming nearly 95 percent of transactions by the 9 p.m. ET cutoff on trade date, significantly higher affirmation rates than in a T+2 environment.[23]

Transparency of Short Selling and Securities Lending

In the wake of the 2008 financial crisis, Congress directed the SEC to enhance the transparency of two separate areas: short selling of equity securities[24] as well as securities lending.[25]

The staff’s GameStop report also noted that increased transparency regarding short selling should be considered.

Thus, in October 2023, we adopted a rule that broadens the scope of short sale-related data available to regulators and the investing public.[26]

The short sale rules will promote greater transparency about short positions both to regulators and the public. Investment managers will report to the Commission, and an aggregated, anonymized version of that information will be disclosed to the public with a delay.[27]

Given past market events, it’s important for the Commission and the public to know more about large short positions in the equity markets, especially in times of stress or volatility.

Also in October 2023, we adopted a rule to bring greater transparency and efficiency to the securities lending market.[28]

The more than $3 trillion securities lending market can help investment funds, endowments, and pension funds generate additional revenue. This market, though, is opaque. The public often cannot access data about it unless they purchase a subscription.

In fulfilling Congress’s mandates with regard to the transparency of short selling and securities lending, these rules will help ensure regulators and market participants benefit from this comprehensive and timely information.

Digital Engagement Practices

The GameStop events nearly four years ago also highlighted the use of behavioral prompts and nudges, such as those that had game-like features and celebratory animations. The staff said consideration should be given to whether such prompts are likely intended to lead investors to trade more than they would otherwise.

One of the great transformations of the last 20 years is that now people can trade stocks and get investment advice a click away in their apps. This widens access to the markets and lowers costs.

We’ve also seen brokerages and investment advisers use sophisticated analytic tools to interact with investors. We’re used to this from other parts of our lives, whether it’s the movie streaming platforms, online shopping pushes, or other forms of narrowcasting that give us individual nudges.

Yet when it comes to brokers and investment advisers, are their algorithms optimizing just for the customer or also for the broker or adviser’s interests? Broker-dealers and investment advisers, regardless of whether they are interacting with customers the old-fashioned way with human thought or with algorithms, need to ensure they are not putting their own interest ahead of the interest of their customers.

Thus, after the GameStop report in the fall of 2021, we put out a request for comment on digital engagement practices. If the optimization function in the AI system is taking the interest of the platform into consideration as well as the interest of the customer, this can lead to conflicts of interest. We then proposed a rule in July 2023 regarding the use of predictive data analytics.[29] We’ve received a lot of feedback from the public on this proposal. As I’ve done from time to time with other rules, I’ve asked staff to consider whether it would be appropriate to seek further comment, possibly, on a modified proposal.

Conclusion

Let me conclude where I started. We have the deepest, most liquid equity markets in the world. These $55 trillion markets are critical for families investing for their future. They are critical to capital formation, job creation, innovation, and the overall economy.

As we were so keenly reminded, though, with the GameStop events nearly four years ago, even the capital markets leader must constantly look to improve and adapt to the times.

That’s why I’m so proud of the work we’ve done, along with so many market participants, to ensure that we have the most efficient and resilient equity markets—delivering for investors and issuers alike.

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