Analysts and traders say the expected changes to the Securities and Exchange Commission’s US stock-trading rules are likely to draw strong opposition from brokerages and firms making electronic markets that handle orders from small investors.
The agency is preparing to propose Major Changes in the stock market pipeline As it fell, The Wall Street Journal reported Monday. SEC Chairman Gary Gensler is expected to outline some of the SEC’s plans in a speech Wednesday. grow by change crazy business In
GME 14.11%
and other meme stocks in early 2021, resulting in heavy scrutiny of individual investors’ conduct of trades.
The Journal reported that one of the most consequential changes being discussed by the SEC is the potential need to send stock orders from more individual investors to auctions, where trading firms can compete to fill the orders at the best price.
Such auctions would represent a major change in the functioning of the US stock market. Currently, when investors enter orders using brokerages like
Brokers often place orders to electronic market-making firms that execute them. In return, market makers often pay a cash incentive to the brokerage, a practice called payment for order flow,
Mr Gensler has criticized such payments as a conflict of interest to brokers, and has suggested that the business of making retail markets is too focused. Market makers are those firms that buy and sell stocks throughout the day and earn profit by collecting the difference between the purchase and sale price. A handful of such firms, including Citadel Securities and
Handle the lion’s share of US stock trades for individual investors.
By including more such trades in competitive auctions, the SEC will try to get more market makers to compete for the business of individual investors, in the hope that investors get a better price for their orders.
Joe Saluzzi, partner and co-founder of brokerage Themis Trading LLC, said retail brokers and market-makers stuck in the current system will fight Mr Gensler’s changes, potentially even filing a lawsuit to block any regulatory changes.
“Whenever you threaten the current status quo that benefits a lot of people, they will absolutely fight you,” said Mr. Saluzzi, whose firm handles stock trades for institutional investors and hedge funds. Is.
Executives at retail brokerages and market-making firms have been wary of Mr. Gensler’s plans as he indicated last year that he would pursue a change in market structure, Firms such as Robinhood, Virtuo and Citadel Securities maintain that investors get higher-quality execution from existing systems, as market-makers handling the trades of smaller investors provide better value if their orders are sent to public stock exchanges. go. Pay for order flow has also made it possible for brokerages to offer zero-commission trading.
Virtu estimates that US individual investors saved $11 billion on their trades in 2020, passing those trades to market makers instead of exchanges.
Virtu criticized Mr. Gensler’s idea of bringing order-by-order competition to individual investors’ stock orders, saying it would eliminate one major advantage of the current system: the guarantee that a market maker would get what they wanted from a broker. Every retail order has to be filled. Priced at or better than the best available on the public stock exchanges. If those orders were instead sent up for auctions, the retail brokerage would not have a clear way to ensure that they would be executed. If an order did not execute at the auction, the retail brokerage would need to find another place to execute and bear additional costs such as exchange transaction fees. According to Virtue, the end result will not be an improvement for ordinary investors.
Virtu chief executive Douglas Sifu suggested in an emailed statement that it would face litigation if the SEC proceeds with the changes reported by the Journal.
“The entire market will evaluate any proposal to ensure that it complies with rulemaking requirements, aligns with the mandate of the SEC, and includes a full economic and competitive analysis,” he said.
Robinhood declined to comment. A spokesperson for Citadel Securities said the firm looks forward to reviewing the SEC’s proposals and working with the agency.
One group that may be happy with Gensler’s proposals are stock exchanges, which are likely to win more orders from individual investors, which are now viewed by market makers, said Hitesh Mittal, founder and CEO of trading-technology firm BestX Research. is executed privately.
“Exchanges will love it,” said Mr. Mittal.
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