U.S. equity markets remain a global benchmark for transparency, liquidity, and resiliency. But even the strongest market structures must evolve with the times. In its recently released white paper, Enhancing Competition and Innovation in U.S. Financial Markets, Citadel Securities outlines a measured path forward—one that avoids sweeping changes in favor of smart, targeted reforms.
The paper underscores the success of recent updates such as T+1 settlement and enhanced execution quality disclosures, which have delivered billions in savings and improved retail access to liquidity. But it also highlights emerging threats: opaque trading practices, inefficient fee structures, and outdated regulatory assumptions that no longer reflect today’s markets.
One of the most debated reforms has been the SEC’s new rule on tick sizes and access fees. Intended to stimulate competition, the rule shrinks quoting increments and slashes access fees across the board. But Citadel argues that the Commission has cast too wide a net. “The Commission defined the universe of ‘tick-constrained’ symbols too broadly,” the paper states, calling it a “risky, ill-conceived, and poorly designed experiment.” Instead, it proposes a limited pilot involving 200 liquid names with narrow spreads—supported by proportionate access fee adjustments—to avoid market-wide disruption.
The paper also takes aim at private rooms within Alternative Trading Systems (ATSs). These increasingly resemble single-dealer platforms, allowing firms to selectively choose counterparties without meeting the fair access standards required of public exchanges. “One-to-one or one-to-many private rooms do not appear to satisfy those requirements,” the paper warns. It calls on the SEC to enforce ATS rules more rigorously, require consistent disclosures, and eliminate loopholes that let ATSs sidestep Rule 605 reporting by defaulting orders as “not held.”
Citadel also renews criticism of the Consolidated Audit Trail (CAT), citing runaway costs and opaque oversight. Originally projected to cost under $50 million per year, CAT has ballooned to over $250 million annually and more than $1 billion in total. “The CAT system is expensive and essentially funded by the public but operates outside the direct oversight or authorization of Congress,” noted Commissioners Peirce and Uyeda in comments cited by the paper. Citadel urges the SEC to freeze CAT fee collection and expansion pending a full audit of its governance, cost structure, and cybersecurity controls.
Execution quality transparency remains a key focus. While the SEC has enhanced disclosure rules, the paper recommends further refinements—clarifying how “good-til-cancelled” orders are treated under Rule 605, and repealing the burdensome 606(b)(3) requirement that forces brokers to retain large volumes of routing data rarely used by investors.
The white paper also addresses an increasingly contentious issue: exchange liability. Despite operating as for-profit entities that compete directly with brokers and trading firms, exchanges continue to enjoy outdated monthly liability caps, often no more than $500,000. Citadel calls for meaningful increases to these limits and for unused allowances to roll forward—arguing this would better protect market participants and promote more resilient infrastructure.
Another notable recommendation: implement a “professional customer” classification in equities, mirroring the approach already used in the options market. Without this, the paper warns, “professional traders can masquerade as retail customers and obtain execution priority,” diluting the benefits intended for true retail investors.
The paper also confronts the economic distortions created by exchange proliferation. “There are significant costs associated with this proliferation, including those related to connectivity, physical infrastructure, and operational complexity,” it notes. Citadel supports revising the SIP revenue-sharing formula to prioritize executed trades over displayed quotes and establishing a minimum volume threshold for fee eligibility. Until new exchanges meet a 2% market share threshold, they should face hard caps on data and connectivity fees.
Intentional delay mechanisms—once explicitly barred under Regulation NMS—have also crept back into the market under the guise of “de minimis” delays. These systems allow asymmetric “last look” advantages, undermining price discovery and increasing investor costs. The paper urges the SEC to return to the original standard: protected quotes must be immediately and automatically accessible, with no exceptions.
The burden of Section 31 fees is another longstanding issue. These costs have risen sharply and are levied almost exclusively on equities and options—despite the SEC’s expanding purview across asset classes. The recommendation: stabilize the fee and distribute it more equitably across all markets the Commission regulates.
Perhaps most fundamentally, Citadel calls for greater transparency in how rules are made. The SEC has recently proposed multiple overlapping reforms with siloed economic analysis, leaving market participants to piece together the cumulative impact. “The Commission issued four separate equity market structure proposals… without even attempting to consider the effects these proposals would have on each other,” the paper points out. Moving forward, the SEC should be required to assess the combined economic effects of related proposals and align policy goals across rulemakings.
Additional recommendations include repealing Dodd-Frank provisions that allow exchanges to implement fee filings without SEC approval, raising listing standards to limit the growth of speculative penny stocks, and ensuring a consistent regulatory framework for 24-hour trading. As more exchanges and ATSs move into overnight sessions, the paper stresses that “key market infrastructure” such as NSCC, trade reporting, and settlement protocols must be ready to support this activity.
In all, the white paper provides a thoughtful, data-backed framework for modernizing equity markets without overreaching. It argues that targeted reforms—focused on transparency, fairness, and cost discipline—are both necessary and achievable.
For market participants navigating today’s complex regulatory landscape, the message is clear: smart regulation can support innovation, safeguard investor protections, and preserve the competitive edge that defines U.S. markets.
In addition to equities markets, the paper also provide policy recommendations for: Equity Derivatives, U.S. Treasuries, Credit, and Digital Assets.
