WASHINGTON/NEW YORK, June 8 (Reuters) – The top U.S. securities regulator unveiled plans on Wednesday to overhaul Wall Street’s retail stock trading rules, aimed at boosting competition for broker-dealer order handling. commission-free to ensure mom-and-pop investors get the best price for trading.
U.S. Securities and Exchange Commission Chairman Gary Gensler told an industry audience he wants to force trading firms to compete directly to execute trades for retail investors.
The Wall Street watchdog plans to examine the growth in recent years of the practice of payment for order flow (PFOF), which is banned in Canada, the United Kingdom and Australia.
Join now for FREE unlimited access to Reuters.com
Some brokers, such as TD Ameritrade, Robinhood Markets, and E*Trade, accept these payments from wholesale market makers for orders. In December 2020, Robinhood actually paid a fine related to the practice, which the SEC said increased costs for investors using the online brokerage. Read more
A ban on the practice of PFOF is not out of order, Gensler said. On Wednesday, he said the practice has “inherent conflicts,” while noting that some commission-free brokerages operate without PFOF.
“I asked staff to take a big, cross-sectional view of how we could update our rules and make our stock markets more efficient, especially for retail investors,” Gensler said.
Investor advocates hailed the SEC’s plan, which would be the biggest shake-up to U.S. stock market rules in more than a decade. But financial industry executives were quick to blast the plans, saying they could prevent commission-free brokerages from serving more investors.
“Too many players in the financial industry are getting rich today through anti-competitive and predatory practices in highly fragmented markets that result in abuse and even rip-offs for retail investors,” said Dennis Kelleher, managing director of Washington-based advocacy group Better Markets. which supports the plans of the SEC.
Joseph Mecane, head of execution services at Citadel Securities, warned against sweeping plans to revamp the market.
“We talk about how our markets are the envy of the world,” Mecane said. “We have to be very careful not to… unintentionally take ourselves back to a time that looks worse than today.”
“Let’s keep an eye out for the retail investor who’s never had better liquidity and low-cost trading,” said Kirsten Wegner, who leads the Modern Markets Initiative, a Washington-based group that represents platforms high speed trading.
Gensler said that while PFOF is still allowed, the SEC wants the rules to require market makers to disclose more data about the fees those firms earn and the timing of trades.
Gensler’s announcement would generate formal proposals in the fall. The public could then weigh in before the SEC votes on whether to adopt them.
Dan Gallagher, director of legal, compliance and corporate affairs at Robinhood, said his firm “looks forward to reviewing the Commission’s potential rule proposal and engaging with the SEC over the course of a meaningful notice and comment rule-making process”.
The proposed changes would fundamentally change the wholesalers’ business model. They could also affect brokers’ ability to offer commission-free trades to retail investors. Reuters first reported the reforms in March. Read more
The PFOF came under regulatory scrutiny last year when an army of retail investors went on a buying spree of “meme stocks” like GameStop and AMC, squeezing hedge funds who had sold the shares short. Many investors have purchased stocks using commission-free brokers such as Robinhood.
To bolster order-by-order competition, the new rules would call for “open and transparent” auctions aimed at providing investors with better prices. They would also require brokers executing trades to guarantee the best price for investors and improve transparency around the procedural standards that brokers must follow when processing and executing orders.
They would also require brokers and market centers to disclose more data, including a monthly summary of price improvement and other statistics, Gensler said.
The rules would seek to reduce the minimum price increment or so-called quote size to ensure that all trades occur within the minimum increment.
Currently, retail brokerages can send client orders directly to a wholesale broker for execution, as long as the broker matches or betters the best price available on US exchanges. Larger market makers usually undercut the best price by a fraction of a penny. Gensler criticized this model as limiting competition for retail orders.
“It’s great to see the SEC taking a holistic approach to this problem – there’s no one answer, we need changes in different parts of the market,” said Dave Lauer, CEO of financial platform Urvin. Finance.
Join now for FREE unlimited access to Reuters.com
Reporting by Katanga Johnson in Washington and John McCrank in New York; Editing by David Gregorio, Carmel Crimmins and Matthew Lewis
Our standards: The Thomson Reuters Trust Principles.