Dr. Jonathan Brogaard, the Kendall D. Garff Chaired Professor in the Department of Finance at the University of Utah’s David Eccles School of Business, recently provided expert testimony before a United States House of Representatives subcommittee.

A leading authority in market microstructure, Brogaard was in Washington D.C. to offer a critique of the Securities and Exchange Commission’s (SEC) proposed equity market structure reforms.

“The importance of this hearing cannot be overstated,” Brogaard told the U.S. House Financial Services Subcommittee on Capital Markets. “… The SEC has embarked on what would be an expensive and dramatic redesign of equity market structure without first demonstrating a viable and credible economic case for doing so.”

In his testimony, Brogaard argued that the proposed reforms — which aim to overhaul how securities are traded — are unnecessary and potentially harmful given the current efficiency and liquidity of U.S. equity markets.

He noted that equity market liquidity has improved on account of two factors: 1. Increased diversity of participants, with younger generations now alongside professional investors; and 2. Trading costs presently being among the lowest in history, sparking investors’ willingness both to enter the market and to trade.

However, the professor contended that the SEC’s proposals — such as the Regulation Best Execution and Order Competition Rule — are based on flawed economic analyses and could lead to increased costs for investors and thus reduced market quality.

“Requiring individual broker-dealers to replicate the same kind of access into various trading venues and the strategic expertise would be costly, duplicative and wasteful, and ultimately borne by investors,” Brogaard said. “Tasking each retail brokerage firm to invest in developing the substantial infrastructure necessarily to optimally execute trades across the national market system and to connect, monitor, and evaluate in real time the myriad trading venues to essentially recreate the existing system represents an enormous and expensive undertaking.”

He also emphasized the need for robust economic analysis and suggested that recent enhancements to SEC Rule 605 should be leveraged to better understand market dynamics before implementing further changes.

To that end, he encouraged a wait-and-see approach.

“With the enhanced reporting requirements, academics can more rigorously evaluate the performance of various market centers,” said Brogaard. “…With the adoption of changes to Rule 605, it is common sense to slow the pace of regulatory reform until this new data comes online and can be used to establish key market baselines and adequately inform the SEC’s economic analyses of any proposed reforms.”

He concluded his remarks by calling the U.S. stock market “an economic crown jewel” valued at $44 trillion and representing approximately 41% of global equity market capitalization, and noted that a potentially misaligned reform agenda carries far-reaching cost: “In this regard, such a dramatic and transformative reform proposal for equity markets appears out-of-sync with the vibrant and internationally envied state of our securities markets.”