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SEC says brokers enticed by payment for order flow are making trading into a game to lure investors


Rafael Henrique | LightRocket | Getty Images

According to the Securities and Exchange Commission, online brokerages are attempting to boost revenue by using controversial industry practices like payment for order flow. This is to promote activity among retail investors.

Wall Street’s main regulator on Monday released its highly anticipated report on the GameStopThis was the beginning of the year’s trading mania. It covered 44 pages about the fall of the trading frenzy and raised concerns over a variety of issues such as back-end fees that brokerages get, gamification in trading, disclosures on short-sales, and disclosures. However, it did not place blame on any single person or organization.

According to the SEC report, “Payment for Order flow and the incentivities it creates could cause broker-dealers find novel ways of increasing customer trading,” SEC officials stated.

One of the biggest revenue streams is payment for order flow RobinhoodStock trading app ‘, which is favored by millennials, went public on August. However, the practice is now under greater scrutiny because many believe it creates a conflict between brokerages that are incentivised to place orders at the market-maker who pays the highest rebate. Gary Gensler (SEC Chair) had previously warned about the dangers of this practice. is not off the table.

Brokers can be used to encourage trading. RobinhoodTheir platforms were visually appealing and offered game-like features like points, rewards and leaderboards to encourage engagement. Amid criticism, Robinhood got rid of its confetti animation in March.

According to the report, “Consideration must be made as to whether or not game-like and celebratory animations which may create positive feedback for trading encourage investors to trade more often than otherwise.”

The SEC review might not have made enough concrete recommendations to lay the foundation for possible changes in U.S. trading practice. The agency also didn’t reach a conclusion as to whether any of the trading — and the restrictions on trading — was manipulative and whether brokerages played by the rules during the mania.

Transparency and risk management

A group of amateur traders from Reddit’s WallStretBets forum bought shorted stocks up “to the moon” during January’s peak, creating huge short squeezes at GameStop and other names. AMC.Robinhood suffered from unprecedented volatility, and it had to tap credit lines as well as limit trading on a short list of short-squeeze name traders. At one point the central Wall Street clearinghouse ordered a tenfold increase in its deposit requirements.

According to the SEC’s Report, “This episode highlights that clearing is an important part of risk management in equity trading. However, it raises concerns about potential effects of margin calls on broker-dealers with lower capital and suggests other options for reducing these risks.” The settlement cycle can be shortened to reduce the risk of such entities to clearinghouses and other participants.

SEC officials also discussed whether greater transparency should be provided for short selling. Securities lending and borrowing are currently opaque. Investors don’t have to disclose their bearish bets, and the SEC collects information on what percentage of a company has been sold short.

According to the SEC, officials stated that “the interplay of shorting and price dynamics are more complicated than this narratives would suggest.” Regulators would be able to track the dynamics better if they had improved reporting on short sales.

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Mike Robinson
Mike covers the financial, utilities and biotechnology sectors for Street Register. He has been writing about investment and personal finance topics for almost 12 years. Mike has an MBA in Finance from Wake Forest University.