SEC chief Gensler considers new rules governing market makers and payment for order flow after GameStop drama
Last January’s GameStop saga focused the retail world on the market’s plumbing issues – the workings of how brokers execute orders to buy and sell stocks and derivatives. – like few previous episodes.
Eighteen months later, U.S. Securities and Exchange Chairman Gary Gensler launches an effort to completely overhaul that market structure for the first time in nearly 2 decades, in a speech Wednesday at Piper Sandler’s Global Exchange Conference. .
Americans were outraged that stockbrokers like Robinhood Markets Inc. HOOD,
temporarily blocked users from buying shares of GameStop Corp. EMG,
and other so-called meme actions, and many blamed financial arrangements between brokers and market makers like Citadel Securities and Virtu Financial Inc. VIRT,
These market makers now execute more than 90% of retail orders, Gensler said, and they typically pay stockbrokers for the privilege of executing those orders, on which they make a small profit on the spread between the price at which they will buy and sell a security. Add those small profits — Citadel Securities would have posted record total revenue of $7 billion last year.
In fact, brokers have restricted trades in order to manage risk and obligations to the clearing house which guarantees that retail traders’ orders will be executed even if their broker goes bankrupt.
There is no evidence that order flow payment was the reason brokers restricted trades, but the episode highlighted the appearance of a conflict of interest between retail broker clients. and market makers who are their main source of income.
“Payment for order flow can raise real conflict of interest issues,” Gensler said. “Some major trading companies seeking to attract Robinhood order flow [said] that there was a trade-off between paying for order flow and improving prices for customers. »
To address these potential conflicts, Gensler said he asked staff to recommend rules that could require retail brokers to submit retail orders to an auction process, in which each market maker competes in a transparency for retail based on the best price offered.
“I have a customer that is 330 million Americans, and all the people on Reddit posts, they are our customers and they don’t get the full benefit of full and fair competition when they place an order in the marketplace. retail right now,” Gensler said at a press conference after the speech, referring to the active retail community on the social media website.
“American retail investors enjoy one of the most efficient and cost-effective investment environments in history. Robinhood’s commission-free, no account minimum investment model has saved investors billions,” said Dan Gallagher, Robinhood’s chief legal officer, in a statement. “We look forward to reviewing the Commission’s potential rule proposal and engaging with the SEC in a meaningful notice-and-comment rulemaking process.”
The regulator has also proposed a range of other reforms, including setting a minimum market-wide price increase – called a tick size – that all market makers and exchanges would adhere to. As it stands, exchanges like the New York Stock Exchange can price stocks to the nearest penny, while market makers can offer prices in much smaller increments, giving them a price advantage. .
Additionally, Gensler suggested changing the method by which national best-offer and offer prices — used as a benchmark for brokers who are required to find the best price for their clients — by creating a separate metric for trades under 100 shares, order sizes typically associated with retail traders.
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