The Securities and Exchange Commission is weighing changes to stock-market rules that could force trading firms to directly compete to execute trades from retail investors, according to people familiar with the matter.
A move by the SEC to press major wholesale brokerages to win auctions for orders by mom-and-pop investors would be a major change for the stock market. While nothing has been announced, the change is among those being considered by staff at Wall Street’s main regulator, said the people who asked not to be named discussing the plans which remain private.
The specifics of the SEC’s plans, which are still taking shape, follow a months-long review of regulations. Almost exactly one year ago, SEC Chair Gary Gensler said he’d asked the agency’s staff to examine best execution requirements — legal mandates that ostensibly force brokers to process customers’ orders at advantageous prices.
The SEC didn’t respond to a request for comment on the possible rule changes, which were earlier reported by The Wall Street Journal.
Gensler rattled financial firms last year when he refused to rule out prohibiting the practice of brokers getting paid to send customers’ stock orders to trading as part of the agency’s rule changes. Currently, firms including Virtu Financial Inc. and Citadel Securities pay retail brokerage firms to execute their clients’ trades, a practice known as payment-for-order-flow.
Doug Cifu, Virtu’s chief executive officer, said the SEC should be careful not to make changes that unintentionally make trading more expensive. “Order-by-order competition enables selective competition because it removes the retail brokers’ ability to demand best execution from wholesalers on every order,” he said in a statement.
“The current market structure has resulted in tighter spreads, greater transparency, and meaningfully reduced costs,” a spokesperson for Citadel Securities said in an emailed statement. “We look forward to reviewing the proposals and working with the SEC and the industry towards our longstanding objective of further improving competition and transparency.”
Changes would also impact the exchange businesses which display prices and aggregate trading data. Representatives from Nasdaq Inc. and the New York Stock Exchange declined to comment.
Online brokers argue that replacing customer-paid commissions with revenue that comes from market makers has opened up investing to millions of young people, including women and minorities who traditionally have kept their money out of the securities markets. Firms also argue that the vast majority of the retail orders they offload are executed at a lower price. That complies with SEC rules that demand investors get the “best execution” for trades.
Opponents, however, say the order payments are difficult to understand and include hidden costs that investors pay without even knowing. They also say it gives massive trading firms knowledge of where the market is heading.
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