Seeing a lot of talk today, following news of NYSE/Nasdaq litigation to stop SEC's SIP Infrastructure plan, about how adding odd lots to the SIPs would benefit investors. Let's not forget that this 900-page behemoth isn't just about adding odd lots to the SIPs. Thread:

The rules also establish sub-100-share “round lots” for a large number of securities, mandate the addition of depth and auction data to the SIPs and authorize the creation of new SIPs to compete with the existing ones.

And, importantly, they’re designed to work in tandem with an SEC order forcing a new governance system on the existing SIPs that could transfer their control to the brokerage industry, which would then set the commercial terms through which rival SIPs would obtain exchange data.

This isn’t just about odd lots, or “modernizing” the SIPs because they’re 35 years old. The Exchange Act and ’75 amendments to it are at least that old, designed for a time when all trading was manual, slow and done on exchanges run as non-profit utilities by their broker-owners.

Yet we hear no cries of urgency to “modernize” the Act. Rather, commercial opponents of the incumbent exchanges conveniently and repeatedly wield its antiquated language as a cudgel to achieve profit-motivated policy goals.

This is not to say that the SIPs and their governance should remain wholly as they are today, or that certain aspects of the infrastructure and governance proposals are entirely without merit.

It also doesn’t mean that we can’t do a better job addressing the distortions caused by applying a one-size-fits-all, cents-per-share market structure to all stocks, regardless of share prices and liquidity profiles.

The big exchanges, in addition to making significant SIP upgrades in recent years, have supported several measures to improve them further, including giving non-SROs votes on the SIP boards, exploring “distributed SIPs” to further minimize latency issues and adding more content.

As for odd lots, a Nasdaq-convened working group in 2019 developed a plan to implement “intelligent” tick sizes, which would minimize the need for odd lots and optimize public-market price discovery. Many other major markets globally use flexible tick sizes for this purpose.

Major institutional investors and brokers supported the plan (full disclosure: I served on the working group). But it has been gathering dust for more than a year, as regulators pursued a different course.

For the past few years the answer to every market-structure question, concern or problem has been “it’s the big exchanges’ fault.” Meanwhile, the % of volume occurring away from exchanges — in far less-regulated, less-transparent, dark, non-public venues — has skyrocketed.

In January a record 47.19% of US stock-market volume traded off-exchange. The top 20 most-active issues, accounting for 19% of all volume, traded 58.78% off-board. Nine of the top 20 exceeded 60%. Just yesterday, off-exchange share hit a daily record of 50.47% of total volume.

Yes, much of this is driven by the pandemic and low-priced or “meme” stocks like GME and AMC. But it also affects blue chips like Apple (49% OTC in January), Ford (44%) and GE (43%), which are held and traded by a wide variety of market participants.

And are the “meme” names traded only by retail and market makers? No. They’re often in total-market and small-cap indexes and therefore owned en masse by mom and pop in 401(k)s, IRAs, 539s, etc.

Individual market participants clearly can benefit from trading in the lighter-regulated off-board world. Bilateral and otherwise segmented, non-displayed trading can mean better price and size for liquidity consumers and lower adverse-selection risk for providers.

But we also need to remember a core function of markets: getting the price right for asset owners and issuers. With half of total volume occurring away from public, displayed markets, can we be sure we’re doing that?

Are the “better” prices investors get off-board actually worse than they could be if we encouraged more interaction among a wider array of trading interest?

Governments around the world recognize this tension between the private benefits of dark OTC trading and the public benefits of fair-access, lit markets, and restrict the former to encourage the latter. I think it’s fair to say the US has the most-liberal regime in the world.

I don’t know whether that’s good or bad. I tend to not want to mess with market structure because our jury-rigged, overly complex system delivers better outcomes than the old one it replaced. I don’t like encouraging more unintended consequences we can’t control.

But at the very least, it’s time to broaden the public-policy conversation from profit-motivated big-exchange blaming and also consider questions like these, which affect market quality and price discovery for all participants.

I’ve said this many times before and believe it now more than ever: we need to talk about harmonizing the two-tier system that subjects exchanges to one set of rules and off-exchange trading to another.

So many of the features of modern market structure that many find objectionable, including the degree of complexity that comes from dozens of venues, hundreds of order types and Byzantine fee schedules, stem from this disconnect.

SRO limited liability and other exchange advantages should be part of that discussion. But we need to stop pretending that the off-exchange world doesn’t also have massive competitive edges, owing to lighter regulation, that underlie much of this complexity.

Most important: We should focus not on commercial disputes among intermediaries, but rather how market structure serves issuers and asset owners. In that context, exploring whether record-high OTC trading hurts market quality and price discovery is both appropriate and necessary.