U.S. SEC chief Gary Gensler unveils plan to overhaul Wall Street stock trading
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U.S. Securities and Exchange Commission Chair Gary Gensler speaks before a Senate Banking, Housing and Urban Affairs Committee oversight committee on the SEC at Capitol Hill, Washington, September 14th, 2021.
Evelyn Hockstein | Pool | Reuters
After the last-year meme stock mania, questions arose about whether Wall Street was offering the most value to mom-and-pop investors.
Gary Gensler who is chair of U.S. Securities and Exchange Commission, revealed the plan. It would allow trading firms to direct compete with retail investors in order to increase competition.
The Wall Street watchdog plans to scrutinize the controversial payment for order flow, or PFOF, practice, in which some brokers, like TD Ameritrade, Robinhood Markets and E*Trade, are paid by wholesale market makers for orders.
Gensler spoke to an industry crowd on Wednesday, saying that he asked his staff for a comprehensive, cross-market perspective of ways in which they could improve their rules and increase efficiency in equity markets.
He stated that the SEC regulations would require marketmakers to provide more details about their fees and trade timings in order for investors’ benefit.
Gensler’s announcement is the largest shakeup in U.S. equity markets rules for over a decade. It will lead to formal proposals expected this fall. Before the SEC votes on their adoption, they will be available for public input.
These changes will fundamentally change the wholesaler business model. The changes may also impact brokers’ ability offer retail investors commission-free trading. These reforms were announced by Reuters on March 1.
PFOF was subject to regulatory scrutiny after a group of retail investors bought a lot of meme stocks last year. GameStopAnd AMCHedging funds that were shorting shares was also squeezed. Many investors have purchased shares from commission-free brokers, such as Robinhood.
New rules could increase order-by–order competition. The new rules would define an agency-specific best execution for equity and securities. This will ensure that investors and broker-dealers benefit from greater detail about the procedures brokers must follow when processing and executing customers’ orders.
Gensler explained that brokers dealers and markets centers would be required to share more information on order execution quality for investors.
To better match off-exchange activity, the rules seek to reduce or harmonize the minimum tick size.
Wholesale overhaul
Sources said that the proposed rule amendments will contain an SEC definition for “best execution”, which would require retail brokers to submit their customer’s orders to auctions run by exchanges and other venues. This would enable market participants to trade against those orders.
Retail brokerages are able to send orders to wholesale brokers directly, provided that the broker matches or exceeds the U.S. Exchanges’ best price. The best price is usually a fraction of cent for large market-makers. Gensler criticizes this model because it limits competition for retail orders.
Retail brokers would be required to forward PFOF orders to wholesalers that offer the best deals, not the ones paying the highest.
It would change wholesalers’ business model fundamentally. Wholesalers can make more money executing orders from retail investors internally than on public exchanges.
Gensler told Reuters in March he wants to ensure brokers execute orders at the best possible price for investors — the highest price for when an investor is selling, or the lowest price if they are buying.
Dave Lauer (CEO of Urvin Finance), stated, “It is great that the SEC has taken a holistic view to this issue – there is not one answer. We need to change to all parts of the market.”
We need an order-by order standard in order for the best execution, and for open competition to allow order flow. This will ensure that retail investors get the best results. He said that this will encourage more competition and may help end the dominance of off-exchange in that market, which has been there for far too long.”
Advocates for investors want exchanges to be more competitive in order to increase the reliability and consistency of the National Best Bid and offer, a benchmark pricing system.
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