SEC Considers Routing Equity Trades Into Competitive Auctions, Gensler Says
Securities and Exchange Commission Chairman
Gary Gensler
said he has asked agency staff to consider requiring brokerages to route individual investors’ orders to buy or sell stocks into auctions, as part of an effort to increase competition in the market.
The potential change would represent a major shakeup to the lucrative business of executing trades in the stock market. The Wall Street Journal reported Monday that the plan was under consideration. The objective would be to “assure full competition among all market participants to provide the best prices for retail investors,” Mr. Gensler said Wednesday in prepared remarks for a speech to the Piper Sandler Global Exchange & FinTech Conference in New York.
Those market participants are gearing up for a bruising fight with the agency. A top executive with
Robinhood Markets Inc.
blasted the SEC on Wednesday over its efforts to rewrite the rules that govern U.S. stock trading, saying the market was functioning well for ordinary investors.
The auctions outlined Wednesday would likely be the most consequential change in a broader effort to make the market more competitive and transparent for investors and public companies. People familiar with the matter say the SEC could begin issuing proposals under the initiative as early as this fall, kicking off a formal rule-making process that would likely take many months to complete.
Under current rules, brokers must perform “reasonable diligence” to determine the likely best market for executing a trade. Many brokers route orders to big electronic trading firms called wholesalers, including Citadel Securities or
Virtu Financial Inc.,
rather than to exchanges such as the Nasdaq Stock Market, arguing that the wholesalers provide the best prices.
Some brokers, including Robinhood, accept compensation from wholesalers for routing trades to their venues. Mr. Gensler says this practice, known as payment for order flow, creates a conflict of interest and limits competition for individual orders.
“Wholesalers may be saving more than they’re passing along to investors in terms of price improvement,” Mr. Gensler said. “I’ve asked staff to make recommendations for the commission’s consideration around how to enhance order-by-order competition. This may be through open and transparent auctions or other means.”
In addition, Mr. Gensler said he has directed SEC staff to potentially allow stock exchanges to quote shares in increments of less than 1 cent. This could enable venues such as Nasdaq or the New York Stock Exchange to better compete with wholesalers, which can beat the prices publicly displayed on exchanges by adding or subtracting hundredths of a penny to the price of a stock.
“Why not allow all venues to have an equal opportunity to execute at sub-penny increments?” Mr. Gensler said in the speech.
SHARE YOUR THOUGHTS
Will the proposed changes make the stock market work more efficiently for small investors and public companies? Why or why not? Join the conversation below.
SEC staff are also weighing a possible requirement that brokers file monthly reports showing the quality of the prices their customers receive for stock trades. Currently, only market makers–including exchanges and wholesalers–disclose such information.
The agency is also considering creating its own version of the so-called best-execution rule that directs brokers to find the most favorable terms for their customers, Mr. Gensler said. The rule that brokers currently follow was written by the Financial Industry Regulatory Authority, an industry body overseen by the SEC.
“It’s not clear, given the current market segmentation, concentration, and lack of a level playing field, that our current national market system is as fair and competitive as possible for investors,” Mr. Gensler said. “I think we can do better here for retail investors.”
Write to Paul Kiernan at [email protected]
Copyright ©2022 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8
Securities and Exchange Commission Chairman
Gary Gensler
said he has asked agency staff to consider requiring brokerages to route individual investors’ orders to buy or sell stocks into auctions, as part of an effort to increase competition in the market.
The potential change would represent a major shakeup to the lucrative business of executing trades in the stock market. The Wall Street Journal reported Monday that the plan was under consideration. The objective would be to “assure full competition among all market participants to provide the best prices for retail investors,” Mr. Gensler said Wednesday in prepared remarks for a speech to the Piper Sandler Global Exchange & FinTech Conference in New York.
Those market participants are gearing up for a bruising fight with the agency. A top executive with
Robinhood Markets Inc.
blasted the SEC on Wednesday over its efforts to rewrite the rules that govern U.S. stock trading, saying the market was functioning well for ordinary investors.
The auctions outlined Wednesday would likely be the most consequential change in a broader effort to make the market more competitive and transparent for investors and public companies. People familiar with the matter say the SEC could begin issuing proposals under the initiative as early as this fall, kicking off a formal rule-making process that would likely take many months to complete.
Under current rules, brokers must perform “reasonable diligence” to determine the likely best market for executing a trade. Many brokers route orders to big electronic trading firms called wholesalers, including Citadel Securities or
Virtu Financial Inc.,
rather than to exchanges such as the Nasdaq Stock Market, arguing that the wholesalers provide the best prices.
Some brokers, including Robinhood, accept compensation from wholesalers for routing trades to their venues. Mr. Gensler says this practice, known as payment for order flow, creates a conflict of interest and limits competition for individual orders.
“Wholesalers may be saving more than they’re passing along to investors in terms of price improvement,” Mr. Gensler said. “I’ve asked staff to make recommendations for the commission’s consideration around how to enhance order-by-order competition. This may be through open and transparent auctions or other means.”
In addition, Mr. Gensler said he has directed SEC staff to potentially allow stock exchanges to quote shares in increments of less than 1 cent. This could enable venues such as Nasdaq or the New York Stock Exchange to better compete with wholesalers, which can beat the prices publicly displayed on exchanges by adding or subtracting hundredths of a penny to the price of a stock.
“Why not allow all venues to have an equal opportunity to execute at sub-penny increments?” Mr. Gensler said in the speech.
SHARE YOUR THOUGHTS
Will the proposed changes make the stock market work more efficiently for small investors and public companies? Why or why not? Join the conversation below.
SEC staff are also weighing a possible requirement that brokers file monthly reports showing the quality of the prices their customers receive for stock trades. Currently, only market makers–including exchanges and wholesalers–disclose such information.
The agency is also considering creating its own version of the so-called best-execution rule that directs brokers to find the most favorable terms for their customers, Mr. Gensler said. The rule that brokers currently follow was written by the Financial Industry Regulatory Authority, an industry body overseen by the SEC.
“It’s not clear, given the current market segmentation, concentration, and lack of a level playing field, that our current national market system is as fair and competitive as possible for investors,” Mr. Gensler said. “I think we can do better here for retail investors.”
Write to Paul Kiernan at [email protected]
Copyright ©2022 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8