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Wall Street regulator to spell out push to overhaul stock trading -sources -Breaking

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© Reuters. FILE PHOTO. U.S. Securities and Exchange Commission Chair Gary Gensler speaks before the Senate Banking, Housing and Urban Affairs Committee hearing to examine the SEC’s activities on Capitol Hill, Washington, U.S.A, September 14th, 2021. REUTERS/Evelyn Hocks

By Katanga Johnson and John McCrank

WASHINGTON/NEW YORK (Reuters) – Wall Street’s regulator is about to announce rule changes that would force trading firms to directly compete to execute trades from retail investors in a bid to boost competition for orders and improve deals for retail investors, according to four industry sources.

Sources said that Gary Gensler will announce the decision on Wednesday as the chairman of the U.S. Securities and Exchange Commission.

Sources said that the potential rule changes made by the SEC in March were first reported by Reuters. They will focus in part on ensuring competition among retail investors’ orders.

Sources said that the SEC will define “best execution” and require retailers to forward their orders to auctions. These auctions would enable market participants to trade against each other.

The spokesperson from the SEC refused to comment.

Retail brokerages are allowed to send orders to wholesale brokers to execute, provided that the broker matches or exceeds the U.S. Exchanges’ best prices. Gensler criticised this model for limiting retail order competition.

The potential rule changes also seek to scrutinize the practice of payment-for-order-flow (PFOF), in which some brokers, like TD Ameritrade, Robinhood (NASDAQ:) Markets and E*Trade, are paid by wholesale market makers for orders, said the sources, who spoke on condition of anonymity to discuss private agency plans.

Orders for retail must be placed at the lowest publicly available price or higher on any exchange. Market-makers with large market shares often increase the price of the top spot by just a few cents.

According to sources, Gensler will present this agenda during a Wednesday speech. He may also discuss other potential rules changes such as reducing the trading increments of exchanges in order to make them more competitive with non-exchange trading venues.

Gensler said to Reuters March that he would like brokers to place orders at the lowest possible price. That is, the highest price for selling an investor and the lowest for buying.

Gensler will make the announcement via online speech in New York to an industry audience. However, it is more likely that Gensler will do so by July.

These moves may lead to the largest shakeup in U.S. equity markets rules for over a decade. They fundamentally change the business model wholesalers. Wholesalers can earn more by fulfilling retail investor orders inside their own businesses than on public exchanges. This allows them to make more by trading with sophisticated institutional investors or other trading firms.

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.”

To provide retail investors with the most favorable outcomes, we need an order by order standard to ensure best execution and competition for order flow. 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 reliability of the National Best BID and Offer (NBBO) national pricing benchmark.

The SEC should also increase transparency from market makers and exchanges regarding pricing.

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