WASHINGTON/NEW YORK (REUTERS) - The top United States securities regulator on Wednesday (June 8) 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 (SEC) chair Gary Gensler told an industry audience that he wants to require trading firms to directly compete to execute trades from retail investors.
The Wall Street watchdog plans to scrutinise growth in recent years of the payment for order flow (PFOF) practice, which is banned in Canada, Britain and Australia.
Some brokers, such as TD Ameritrade, Robinhood Markets and E*Trade, accept these payments from wholesale market makers for orders. In December 2020, Robinhood actually paid a fine related to the practice, which the SEC said raised costs for investors using the online brokerage.
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 with 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 centres to disclose more data including a monthly summary of price improvement and other statistics, Mr Gensler said.
The rules would seek to shrink the minimum pricing increment or so-called tick size to ensure that all trading occurs in the minimum increment.
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. Mr Gensler has criticised this model as limiting competition for retail orders.
A ban on the PFOF practice is not off the table, Mr Gensler has said. On Wednesday, he said the practice has "inherent conflicts", while noting some zero-commission brokerages operate without PFOF.
Investor advocates praised the SEC's plan, which would be the biggest shake-up of US stock market rules in over a decade. But financial industry executives quickly blasted the plans, saying they could hinder commission-free brokerages from serving more investors.
Mr Dennis Kelleher, chief executive of Washington-based advocacy group Better Markets, who supports the SEC's plans, said: "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 off."
Mr Joseph Mecane, head of execution services at Citadel Securities, warned against broad plans to revamp the market.
"We talk about how our markets are the envy of the world," said Mr Mecane. "We need to be very careful about... unintentionally taking us back to a period that looks worse that how it looks today."
Mr Gensler said that if PFOF is still allowed, the SEC wants rules to mandate that market makers disclose more data around fees these firms earn and the timing of trades.
His announcement would generate formal proposals in the fall, and the public could then weigh in before the SEC votes on whether to adopt them.
