Earlier this year, the SEC released a rule treating significant market participants as “dealers” or “government security dealers.” The fact sheet explains the rationale was to update existing rules to capture modern electronic trading activity. The rule would apply to businesses that are:

• Regularly expressing trading interest that is at or near the best available prices on both sides of the market for the same security and that is communicated and represented in a way that makes it accessible to other market participants; or

• Earning revenue primarily from capturing bid-ask spreads, by buying at the bid and selling at the offer, or from capturing any incentives offered by trading venues to liquidity supplying trading interest.

At the time, I didn’t see the rule as particularly controversial. Market-makers have long been regulated. As trading technology changed, market participants began acting like market-makers without operating under the same regulatory standards. Firms subject to the rule would be required to register and possibly join an SRO if appropriate. The proposal generated a significant comment file and predictable litigation followed.

Two cases challenging the rule were filed in Texas. District Court Judge Reed O’Connor vacated the rule in both cases, one filed by the Crypto Freedom Alliance and the other filed by the National Association of Private Fund Managers, Alternative Investment Management Association, and the Managed Funds Association.

Curiously, both cases were filed in the Northern District of Texas. I wouldn’t have guessed it, but the cover sheet to the Complaint for one of the cases explains that the National Association of Private Fund Managers resides in Tarrant County, Texas. By coincidence, the Crypto Freedom Alliance also resides in Tarrant County. By residing and filing in Tarrant County, litigants end up in the Fort Worth Division of the Northern District of Texas. This means they can draw Reed O’Connor, Mark Pittman, or Senior Judge Terry Means. Judge O’Connor somehow manages to end up with many significant cases.

For context, Steve Vladeck has recently written in response to some comments from Judge O’Connor about judge-shopping.

The decisions just came out today and my read of the Private Fund Managers opinion leaves me with the impression that Judge O’Connor believes that market actors can’t be classified as dealers unless they are somehow directly interacting with customers. This skips past how much markets have changed from the time when Congress enacted the Exchange Act. We don’t use pneumatic tubes to transmit orders anymore.

The rule would have provided more consistency in the Treasury market. Perversely, the largest, deepest, most important market-Treasury–now has some of the least transparency. With the rule getting vacated, regulators will continue to lack information and the ability to oversee the market. I do not expect the new SEC Chair, whoever she or he may be, to appeal this decision.