WASHINGTON, June 9 — The top US securities regulator on Wednesday unveiled a planned overhaul of Wall Street retail stock trading rules, aiming to boost competition for handling orders by commission-free brokerages to ensure mom-and-pop investors get the best price for trades.
US Securities and Exchange Commission chair Gary Gensler said he wants to require trading firms to directly compete to execute trades from retail investors.
The Wall Street watchdog plans to scrutinize growth in recent years of the payment for order flow (PFOF) practice, which is banned in Canada, the UK and Australia.
Some brokers such as TD Ameritrade, Robinhood Markets and E*Trade, accept these payments from wholesale market makers for orders. Robinhood actually paid a fine related the practice in December 2020. The SEC said PFOF raised costs for the online brokerage’s investors.
A ban on the PFOF practice is not off the table, Gensler has said. On Wednesday, he said the practice has “inherent conflicts,” while noting that there are zero-commission brokerages that operate without PFOF.
“I asked staff to take a holistic, crossmarket view of how we could update our rules and drive greater efficiencies in our equity markets, particularly for retail investors,” Gensler told an industry audience.
If the practice is still allowed, he said the SEC wants rules to mandate market makers disclose more data around the fees these firms earn and the timing of trades for the benefit of investors.
Gensler’s announcement, which could lead to the biggest shake-up of US equity market rules in over a decade, would generate any formal proposals in the fall. The public could then weigh before the SEC votes on whether to adopt them.
“We look forward to reviewing the Commission’s eventual rule proposal and engaging with the SEC during a meaningful notice and comment rulemaking process.” said Dan Gallagher, Robinhood’s chief legal, compliance and corporate affairs officer.
The intended changes would fundamentally alter the business model of wholesalers. They could also affect brokers’ ability to offer commission-free trading to retail investors. Reuters first flagged the reforms in March.
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 that had shorted the shares. Many investors purchased shares using commission-free brokers such as Robinhood.
To enhance order-by-order competition, the new rules would call for “open and transparent” auctions aimed at providing investors better prices. They would also require dealers executing trades to ensure the best price for investors and to improve transparency around the procedural standards brokers must meet when handling and executing orders.
They would also require broker dealers and market centers to disclose more data including a monthly summary of price improvement and other statistics, Gensler said.
The rules would seek to shrink the minimum pricing increment or so-called tick size to ensure all trading occurs in the minimum increment.
Wholesale overhaul
Currently, retail brokerages can send customer orders directly to a wholesale broker to be executed, as long as the broker is matching or bettering the best price available on US exchanges. Large market-makers typically improve on the best price by a fraction of a cent. Gensler has 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 not a single answer, we need changes to different parts of the market,” said Dave Lauer, CEO of financial platform Urvin Finance.
Investor advocates want to boost exchanges’ competitiveness to improve the reliability of the national pricing benchmark, known as the National Best Bid and Offer (NBBO), which they see as crucial to leveling the playing field.
“Too many in the financial industry today get rich from anti-competitive and predatory practices in highly fragmented markets that result in retail investors being mistreated if not ripped of,” said Dennis Kelleher, the chief executive of Washington-based advocacy group Better Markets. — Reuters
