WASHINGTON/NEW YORK, June 8 (Reuters) – The top U.S. securities regulator proposed rule changes on Wednesday to transform the way Wall Street handles retail stock trading after last year’s stock market meme raised questions about whether mom-and-pop investors were getting the best price.
The plan, unveiled by U.S. Securities and Exchange Commission Chairman Gary Gensler, would force trading firms to compete directly to execute trades for retail investors to boost competition.
The Wall Street watchdog plans to examine the controversial practice of payment for order flow (PFOF), in which some brokers, like TD Ameritrade, Robinhood Markets and E*Trade, are paid by market makers of big for orders.
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“I asked staff to take a big, cross-sectional view of how we could update our rules and make our stock markets more efficient, especially for retail investors,” Gensler told a newscast. sector public 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 overhaul of U.S. stock market rules in more than a decade, will likely lead to formal proposals this fall. The public can then weigh in on them before an SEC vote to adopt them.
The proposed changes would fundamentally change the wholesalers’ business model. They could also affect brokers’ ability to offer commission-free trades to retail investors. Reuters first reported the reforms in March. Read more
The 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 who had sold the shares short. Many investors have purchased stocks using commission-free brokers such as Robinhood.
The new rules would strengthen order-by-order competition, including via possible “open and transparent” auctions, aimed at offering investors better prices. They would include an agency-specific definition of so-called best execution for stocks and other securities to ensure that brokers and investors benefit from more detail on the procedural standards that brokers must adhere to when processing and the execution of client orders.
They would require brokers and market centers to disclose more data on the quality of order execution 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 quote size to better align with off-exchange activity and harmonize the quote size to ensure all trades occur within the minimum increment. .
The proposed rule changes will include a definition by the SEC of “best execution” requirements that would require retail brokers to send their clients’ orders to auctions, operated by exchanges or over-the-counter trading platforms, which which would allow market participants to compete against each other to trade against orders, the sources said.
Currently, retail brokerages can send client orders directly to a wholesale broker for execution, as long as the broker matches or betters the best price available on US exchanges. Larger market makers usually undercut the best price by a fraction of a penny. Gensler criticized this model as limiting competition for retail orders.
The rules would require retail brokers to send PFOF customer orders to the wholesaler offering the best deal, rather than the one paying the most.
This would fundamentally change the business model for wholesalers, who can make more money executing retail investors’ orders internally than they do on public exchanges, where they might find themselves trading with other sophisticated traders or institutional investors.
Gensler told Reuters in March he wants to ensure brokers execute orders at the best possible price for investors – the highest price when an investor is selling, or the lowest price if they are buying.
“It’s great to see the SEC taking a holistic approach to this problem – there’s no one 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 results for retail investors. This will force greater competition and could help end to the off-exchange oligopoly that has controlled this market for far too long,” he added.
Investor advocates want to boost the competitiveness of exchanges to improve the reliability of the national price benchmark, known as the National Best Bid and Offer (NBBO).
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Reporting by Katanga Johnson in Washington and John McCrank in New York Editing by Matthew Lewis and Carmel Crimmins
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