US Securities and Exchange Commission (SEC) chair Gary Gensler wants to see rule changes that will overhaul Wall Street’s handling of retail stock trades.
The SEC chief announced the proposal on Wednesday, with his view being that this is what is needed in the aftermath of last years’ meme stock mania.
According to the regulator, Wall Street’s handling of trades left a lot of questions regarding whether investors really got the best prices as meme stocks skyrocketed.
Question marks over payments for order flow, or PFOF, surfaced as GameStop and AMC stocks soared amid huge buying pressure from retail investors. PFOF is a market practice that sees select brokers, including the likes of Robinhood Markets, TD Ameritrade and E*Trade, receive order flow payments from wholesale market makers.
Gensler wants to fix Wall Street stock trading
The rule changes will clarify “best execution” requirements to ensure retail brokers share customers’ orders with exchanges or other trading venues via their auctions. Once this is done, all market participants will have a chance to directly compete for the orders.
What happens currently is that retail brokerages have the liberty to send customer orders to that wholesale broker that matches or even tops the best price offered across US exchanges. To get an advantage, large market-makers have reportedly resorted to fractionally upping best price, a scenario that should not be allowed according to the SEC boss.
Speaking at an industry event on Wednesday, Gensler said updating the rules will help “drive greater efficiencies” in the market. Of special interest, he noted, is the need to boost retail investors.
Impact on brokers and wholesalers
Under the new rules, market makers will be obligated to be more transparent on the issue of order execution and fees paid to brokerages firms. They will also be required to be more open with regard to the timing of trades.
Retail brokers will have to send the PFOF customer orders to wholesalers with the best deal, as opposed to those offering the highest pay. As for brokers, the impact is likely to be on whether they will continue to provide commission-free trades.
The SEC chair’s proposals are likely to be formalized this fall, before it’s put to the public for comment. A SEC vote would then follow to have them adopted.
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