by The leading US market watchdog has proposed the most sweeping overhaul of stock trading in nearly two decades in a bid to improve pricing and transparency for small investors.
Gary Gensler, chairman of the Securities and Exchange Commission, said the measures outlined Wednesday in more than 1,500 pages of documents would improve “competition and benefit both ordinary investors and institutional investors.” But his plans have led to resistance from the market maker companies that dominate the system.
Taken together, the proposals would produce the largest changes to US stock trading rules since 2005, reshaping the deal execution business for retail investors.
The agency’s focus on the inner workings of the U.S. stock market has been revived after pandemic-related lockdowns have resulted in an explosion of consumer activity.
This culminated in the dramatic increase in prices of popular so-called meme stocks, such as GameStop and AMC, last January and the imposition of temporary trading restrictions by some brokers to prevent more investors from piling up. by Washington politicians.
The most immediately controversial of the regulator’s proposed rules is a new auction mechanism that would force brokers to offer retail investor orders to a larger group of trading venues if they’re below $200,000.
Another proposal, on so-called best execution, would require brokers to document exactly how they had looked at the venues to ensure they were receiving the best price for their clients.
Currently, the definition of best execution is set by the Financial Industry Regulatory Authority, not the SEC.
“I believe a best execution standard is too important, too central to the SEC’s mandate to protect investors, to not have it on the books as the text of the commission rule,” said Gensler, a Democrat nominee by President Joe Biden.
The proposals have the potential to boost the business of stock exchanges by allowing them to offer share prices in fractions of a cent, just as off-exchange dark pools and wholesalers already do.
Ronan Ryan, president of the IEX exchange, supported the reforms, calling them “a constructive and positive effort to improve transparency, increase competition and ensure that investors can access the best prices available in the market”.
The meme stock incident highlighted the practice of payment by order flow, in which large trading firms such as Citadel Securities and Virtu Financial purchase client orders from retail brokerages such as TD Ameritrade and Robinhood, rather than going directly to the market stock.
While the practice helps big brokers offer retail investors reduced prices or free trades, the SEC fears it may not lead to the best deals for clients. The regulator’s research estimates that small investors are out of pocket as much as $1.5 billion a year, or 1.08 cents per $100 traded, due to what it describes as a “lack of competition.”
Gensler said that, in September, over-the-counter trading accounted for 42% of all equity trading volume. Earlier data from 2009 showed this share to be about a third.
While the SEC’s proposals wouldn’t ban payment for order flow, they would likely make it much less attractive to both brokers and wholesalers.
Citadel Securities, the market’s largest market maker, said, “The US stock market is the envy of the world and any proposed changes must provide demonstrable solutions to real problems while avoiding unintended consequences that will hurt American investors.”
Shares of Virtu, the second-largest group and a strong opponent of Gensler’s planned reforms, fell 6.4% on Wednesday. Virtu declined to comment.
A majority of the five SEC commissioners voted in favor of each of the proposals, but two voted against the tender and best execution plans. Hester Peirce, a Republican commissioner, said the regulator “has a habit of trying to micromanage markets, a habit that I think is in full evidence today.”
Proposals will be open to comments at least until March 31st. Steve Sosnick, chief strategist at Interactive Brokers, predicted “very strident” reactions from many groups. “You’re messing with people’s business models,” he said.
Gensler said reform was needed. “The markets have become increasingly hidden from view, especially for individual investors,” he added. “This is partly because there is no level playing field between different parts of the market – wholesalers, dark pools and enlightened exchanges.”
Separately, the commissioners began Wednesday’s meeting by approving a final rule that will force company executives to wait 90 days to sell shares after establishing so-called 10b5-1 plans, designed to allow for automatic sales of shares that adhere to the rules of the inside trading.
The 90-day period would end a controversial practice in which executives sell shares days after creating a plan, raising suspicions they may have been acting with inside information.
Peirce also raised concerns about some details of the insider trading reforms, but said they would “do more good than harm” and allow insiders “to trade without fear of liability, making it more difficult to misuse the rules.” .
