WASHINGTON/NEW YORK, June 8 (Reuters) – The top US securities regulator on Wednesday proposed rule changes to transform Wall Street’s approach to retail stock trading, after last year’s meme stock mania raised questions about whether large investors they get the best price.
The plan, unveiled by US Securities and Exchange Commission Chairman Gary Gensler, would require retail firms to compete directly to fill retail investor trades in order to boost competition.
The Wall Street watchdog plans to examine the growth in recent years of the Payment for Order Flow (PFOF) practice, which is banned in Canada, the UK and Australia. Some brokers like TD Ameritrade, Robinhood Markets and E*Trade accept these payments from wholesale market makers for orders. Robinhood actually paid a fine related to the practice in December 2020. Read more The SEC said it has increased costs for the online broker’s investors.
Sign up now for FREE unlimited access to Reuters.com
“I’ve asked staff to take a holistic, cross-market view of how we can update our rules and increase the efficiency of our stock markets, particularly for retail investors,” Gensler told an industry audience on Wednesday.
He said the new SEC rules would require market makers to disclose more data about the fees these firms earn and the timing of trades for the benefit of investors.
Gensler’s announcement, the biggest shake in US stock market rules in over a decade, is likely to lead to formal proposals this fall. The public can then weigh them before an SEC vote on their acceptance.
“We look forward to reviewing the Commission’s final rule proposal and cooperating with the SEC for disclosures and comments during a meaningful rulemaking process,” said Dan Gallagher, Robinhood’s chief legal, compliance and corporate affairs officer.
The intended changes would fundamentally change the wholesalers’ business model. They could also affect brokers’ ability to offer commission-free trading to retail investors. Reuters first announced the reforms in March. Continue reading
PFOF came under scrutiny from regulators last year when an army of retail investors went on a buying spree of “meme stocks” like GameStop and AMC and pressured hedge funds that had been shorting the stocks. Many investors bought stocks through commission-free brokers like Robinhood.
The new rules would improve order-by-order competition, including through potential “open and transparent” auctions aimed at offering better prices to investors. They would include an agency-specific definition of so-called best execution for stocks and other securities, to ensure broker-dealers and investors benefit from more detail on the procedural standards brokers must meet when processing and executing client orders.
They would require broker-dealers and market centers to disclose more data on order execution quality for the benefit of investors, including a monthly summary of price improvement and other statistics, Gensler said.
The rules would also aim to reduce the minimum price increment or so-called tick size to better align with OTC activity and harmonize tick size to ensure all trading is done on the minimum increment.
WHOLESALE OVERHAUL
The proposed rule changes will include an SEC definition of “Best Execution” requirements that would force retail brokers to submit their clients’ orders to auctions conducted by exchanges or over-the-counter trading venues, allowing market participants to bid against the Trade to compete orders, the sources said.
Currently, retail brokers can send client orders directly to a wholesale broker for execution, so long as the broker meets or exceeds the best price available on US exchanges. Big market makers usually beat the best price by a fraction of a cent. Gensler has criticized this model as restricting competition for retail orders.
The rules would require retail brokers to send PFOF sales orders to the wholesaler offering the best deal, rather than the one paying the most.
This would fundamentally change the business model of wholesale traders, who can make more money by executing retail client orders in-house than on public exchanges, where they may trade with other sophisticated trading firms or institutional investors.
Gensler told Reuters in March he wants to make sure brokers execute orders at the best possible price for investors — the highest price when an investor sells, or the lowest price when they buy.
“It’s great to see that the SEC is taking a holistic approach to this problem – there is no single answer, we need changes in different parts of the market,” said Dave Lauer, CEO of financial platform Urvin Finance.
“We need an order-by-order standard for best execution and open competition for order flow to deliver the best retail investor outcomes. This will lead to more competition and could help end the over-the-counter oligopoly that has controlled this market for too long,” he added.
Investor advocates want to make exchanges more competitive to improve the reliability of national price benchmarks known as the National Best Bid and Offer (NBBO).
Sign up now for FREE unlimited access to Reuters.com
Reporting by Katanga Johnson in Washington and John McCrank in New York Editing by Matthew Lewis and Carmel Crimmins
Our standards: The Thomson Reuters Trust Principles.
Comments are closed.