Brokers look to replace payment for order flow amid SEC crackdown
Gary Gensler is a chair of the SEC and announces that brokerage companies are exploring alternative methods to pay for order flow.
CNBC learns that Apex Clearing is working on a new idea. Apex Clearing is a clearing company that handles transactions for SoFi and Webull, as well as other fintechs. It has quietly been developing a market for customers matching orders. According to Apex’s CEO, the “auction” process could allow stock exchanges to compete with Virtu and Citadel Securities.
CNBC spoke with Bill Capuzzi CEO of Apex. “The retail investor is the biggest winner.”
Gary Gensler, the chairman of SEC, proposed earlier this week changing Wall Street’s retail trading rules. His plan, according to the top securities regulator, would in part require retail investors to direct trade executions to allow firms to compete. Gensler wants more details about data and fees. Gensler has taken over as chair of the SEC. critical of potential conflicts of interest They complained that power was concentrated in a few market-makers.
Gensler stated that he asked his staff to look at the whole market and determine how they could improve our rules, drive greater efficiency in equity markets, especially for retail investors, during a Piper Sandler Fintech Conference on Wednesday.
A payment for order flow or PFOF is a payment brokerages receive in exchange for their services in directing customers’ trades towards a market maker such as Virtu and Citdel. Although it is often only a small fraction of a penny this arrangement has enabled Robinhood to provide commission-free trading and allowed for them to make a lot of money.
PFOF, which is used widely in the brokerage sector, was criticized during the Gamestop scandal. Gensler and SEC questioned potential conflicts of interest Whether retail traders received the most competitive price. Customers expect companies to offer the lowest price. This is known as “best execution”.
Apex’s Capuzzi indicated that while the market, which technically is an alternative trading system, has been “built and ready for go”, but it still needs to be launched and approved by SEC. If approved, this auction could solve some agency complaints regarding the operation of the securities sector behind closed doors.
Rich Repetto is a senior analyst and managing director at Piper Sandler. He said that there may be more firms looking to try out new ideas before making any official SEC moves. It may reduce the need for changes to existing regulations.
Repetto stated to CNBC that Gensler’s outline had been presented. “There could be some innovation that would get him there without formal rulemaking,” Repetto said.
Repetto stated that while order flow is still possible, the profit margins for wholesale market sellers may be reduced by a marketplace such as the Apex.
Devin Ryan, JMP Securities says that Gensler could also consider the industry returning to “internalization.” This means brokers fulfilling customer orders using their own stock. It is not an option for large self-clearing brokerages, with substantial order flow. This is what Fidelity, for instance. Charles Schwab and E*Trade used to.
Ryan stated that this scenario might even prove more economically for the biggest players, but it would lead to greater liquidity fragmentation and raise more questions about execution quality.
Robinhood’s Chief Legal Officer Dan Gallagher was a former SEC Commission commissioner. Gallagher argued retail traders have had never been so lucky. Gallagher cited the benefits of fast execution, zero commissions, and no account minimums to support keeping things as they are.
“It’s a great climate for retail. Gallagher stated Wednesday that it was a bit worrying to go into the business and mess with it.
A more competitive auction could lead to incrementally higher prices, which is good news for traders. Capuzzi stated that while it seems small (around 1 cent for certain trades), it adds up over time.
Capuzzi stated that if you repeat this repeatedly, you can give a 10 percent better execution. This goes back to retail traders — better execution on the sell and buy sides, which means more money for them.” This can have a significant impact on the market and make the structure more positive.
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