The top U.S. securities regulator has unveiled a planned overhaul of the rules governing Wall Street stock trading, aiming to boost competition for order processing by commission-free brokers to ensure mom-and-pop investors get the best price. for transactions.
On Wednesday, U.S. Securities and Exchange Commission (SEC) chairman Gary Gensler told an industry audience that he wants trading firms to compete directly to transact from retail investors. The move aims to make the $45 trillion US stock market more transparent and fairer.
The Wall Street watchdog plans to see the growth in recent years of the practice of Payment for Order Flow (PFOF) — banned in Canada, the United Kingdom and Australia — in which brokers are paid to send stock orders from customers to market makers, to be examined in detail.
Some brokers, such as TD Ameritrade, Robinhood Markets, and E*Trade, accept these payments from wholesale market makers for orders. In December 2020, Robinhood even paid a fine related to the practice, which the SEC said increased costs for investors using the online brokerage.
A ban on the PFOF practice is not off the table, Gensler said. On Wednesday, he said the practice has “inherent conflicts” while noting that some brokers operate commission-free without PFOF.
“I’ve asked staff to get a holistic, cross-market view of how we can update our rules and drive greater efficiencies in our equity markets, especially for retail investors,” Gensler said.
Investor Lawyers vs. Industry Managers
Investor proponents praised the SEC’s plan, which would be the biggest shake-up of U.S. stock market rules in more than a decade. But financial industry executives were quick to dismiss the plans, saying they could hinder commission-free brokers from serving more investors.
“Too many people in the financial industry today are getting rich from anti-competitive and predatory practices in highly fragmented markets that lead to retail investors being mistreated or even ripped off,” said Dennis Kelleher, the CEO of Washington-based advocacy group Better Markets, which owns the plans of the SEC.
Joseph Mecane, chief executive officer at Citadel Securities, warned of broad plans to renew the market.
“We talk about how the world is jealous of our markets,” Mecane says. “We have to be very careful about… inadvertently bringing ourselves back to a period that looks worse than what it looks like today.”
“Let’s keep an eye on the private investor who’s never had it better when it comes to liquidity and low-cost trading,” said Kirsten Wegner, who leads the Modern Markets Initiative, a Washington-based group representing high-speed trading platforms.
Gensler said that if PFOF is still allowed, the SEC wants rules to require market makers to release more data about fees these companies earn and the timing of trades.
Gensler’s announcement would bring formal proposals in the fall season in the US. The public could then weigh in before the SEC votes on whether or not to adopt it.
Dan Gallagher, Chief Legal, Compliance and Corporate Affairs Officer at Robinhood, said his company “looks forward to reviewing the Commission’s final rule proposal and working with the SEC during a meaningful regulatory process for notification and comment.”
‘Open and transparent’ auctions
The intended changes would fundamentally change the business model of wholesalers. They can also affect brokers’ ability to offer commission-free trading to retail investors.
PFOF came under regulatory scrutiny last year when an army of retail investors began a buying frenzy of “meme stocks” like GameStop and AMC, pressuring hedge funds that had shorted the stock. Many investors bought stock through commission-free brokers such as Robinhood.
To strengthen competition on a per-order basis, the new rules would require “open and transparent” auctions aimed at offering investors better prices. They would also require dealers to transact to ensure the best price for investors and to improve transparency around the procedural standards brokers must adhere to when processing and executing orders.
They would also require broker-dealers and market centers to release more data, including a monthly summary of price improvements and other metrics, Gensler said.
The rules are intended to reduce the minimum price increase or the so-called tick size to ensure that all trading takes place in the minimum increase.
Currently, retail brokers can send client orders directly to a wholesale broker for fulfillment, as long as the broker matches or improves on the best price available on US exchanges. Major market makers usually beat the best price by a fraction of a cent. Gensler has criticized this model for limiting competition for retail orders.
“It’s great to see the SEC taking a holistic approach to this issue — there isn’t one answer, we need changes in different parts of the market,” said Dave Lauer, CEO of financial platform Urvin Finance.