Regulators are taking the first step toward the most widespread revamp in more than a decade of the way stocks are traded, a move that aims to spur better prices for investors and direct more business to traditional exchanges.
The Securities and Exchange Commission, Wall Street's regulator, laid out four proposals on Wednesday that Chair Gary Gensler says will boost transparency and competition. They delve into the guts of how the $43 trillion market works, and they affect everything from order routing to pricing and disclosures that brokers must make to clients.
The SEC's plans, which were being debated by commissioners during an agency meeting, come as a direct response to many of the issues that were spotlighted by last year's meme-stock-trading craze. Over the past year, the effort has been a source of significant angst for the industry as Gensler signaled that major overhauls loomed.
On Wednesday, the SEC chief doubled down. "Today's markets are not as fair and competitive as possible for individual investors — everyday retail investors," Gensler said in remarks ahead of the meeting. Taken together, the rule changes would be the biggest since 2005.
Broadly, the plans could lead to more stock orders filled on exchanges like Nasdaq and the New York Stock Exchange. Currently, a significant chunk of retail trades are handled by by wholesale brokerages like Virtu Financial and Citadel Securities, which pay to process customer trades from firms like Charles Schwab and Robinhood Markets.
Virtu shares fell by as much as 7.5% in New York trading, the biggest intraday decline since April, while Robinhood dropped by as much as 4.4% before rebounding.
Gensler has frequently criticized the arrangement, which is commonly known as payment for order flow, as giving rise to conflicts of interest for brokers and had floated banning the practice. Wholesale brokerages like Virtu and Citadel Securities have pushed back, arguing that it's beneficial to retail traders and allows them to get the best price and have trades efficiently filled.
Backers of payment for order flow also say it's responsible for widespread commission-free trading in the U.S.
Since 2019, most major online brokerages haven't charged retail clients fees for their transactions, following a system made popular by Robinhood. Legions of traders who put money in the market for the first time during the COVID-19 pandemic have known nothing else.
Notably, the SEC won't call for banning the practice. Instead, the proposals would require market participants to engage in auctions for the right to process many orders within milliseconds. That requirement would apply to most market-making firms and major stock exchanges.
In another planned change, the regulator also wants to reduce the rebates that exchanges can offer brokers in their own bid to pull more trades onto those platforms. Platform operators would have to start making their fees publicly known in advance, rather than after the fact based on volume within a given month.
The SEC estimates that the auctions could save retail investors $1.5 billion annually.
If implemented, the auctions could directly affect market-making firms that have built algorithms and technology to process trades quickly and provide what they say is the best deal for customers. The changes would also alter exchanges' existing business models, which involve charging for data and access to their venues for trading.
'Substantial Changes'
In a statement, the Wall Street trade group known as Sifma said that the SEC should be mindful of possible fallout from its plans. "The substantial changes proposed today by the SEC are incredibly complex with material impact to all market participants, but particularly to investors," Kenneth Bentsen, the group's leader, said in a statement. "We strongly believe the SEC needs to be extremely careful in its approach."
Hester Peirce, one of the SEC's two Republicans, also pushed back during the meeting. "There is no emergency in our markets that demands a comprehensive revamping of how market makers and broker dealers handle order flows," she said.
Venues would also need to start allowing stocks to trade at smaller price increments on and off exchanges. The move, according to the SEC, would increase competition to fill orders and lower costs. The agency is also proposing to reduce other fees, which could drive more trading to the platforms.
Also at Wednesday's meeting, the SEC finalized a rule to restrict stock trading by corporate executives. The measure requires company directors and officers to await at least 90 days between scheduling a trade and selling shares. Companies will also have to disclose their executives' use of trading plans in quarterly reports.
- With assistance from Andrew Ramonas.
