The top US markets watchdog has proposed the most comprehensive overhaul of stock trading in nearly two decades in an effort to improve pricing and transparency for retail investors.
Gary Gensler, chairman of the Securities and Exchange Commission, said the measures outlined in more than 1,500 pages of documents on Wednesday would improve “competition and benefit both ordinary and institutional investors.” But his plans have met with resistance from the market-making firms that dominate the system.
Together, the proposals would produce the biggest changes to US stock trading rules since 2005, reshaping the business of executing trades for retail investors.
The most immediately controversial of the regulator’s proposed rules was a new auction mechanism that would force brokers to offer retail investors’ orders to a broader group of trading venues if they were less than $200,000.
Another proposal, called best execution, would require brokers to document exactly how they sourced locations to ensure they got the best price for their clients.
Currently, the definition of best execution is defined 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, not to be in the books as the commission’s rule text,” said Gensler, a Democrat appointed by President Joe Biden.
The proposals have the potential to drive business to exchanges, allowing them to offer share prices in fractions of a cent, 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.”
A surge in retail investor trading in the early months of the coronavirus pandemic highlighted the practice of pay-for-order flow, in which retail brokers like Robinhood were paid by large trading firms such as Citadel Securities to forward orders from investors. customers to them.
While the practice helps brokers offer reduced prices or free trades, the SEC is concerned that it does not produce the best prices for clients. The regulator’s research estimates that retail investors lose up to $1.5 billion annually, or 1.08 cents per $100 traded, because of what it describes as a “competition deficit.”
Gensler said that in September, off-exchange trading accounted for 42% of all equity trading volume. Earlier data showed that share was approximately one-third in 2009.
While the SEC’s proposals don’t ban payment for order flow, they would likely make it much less attractive to brokers and wholesalers. Shares in Virtu Financial, a New York-listed trading firm, fell 6.4% on Wednesday. Virtu declined to comment.
Citadel Securities 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 US investors.”
A majority of the five SEC commissioners voted in favor of each of the proposals, but two voted against the auction and the best execution plans. Hester Peirce, a Republican commissioner, said the regulator “has a habit of trying to micromanage the markets, a habit I believe is on full display today.”
Proposals will be open for comments until at least March 31. Steve Sosnick, chief strategist at Interactive Brokers, predicted “very strident” reactions from many groups. “You’re playing with people’s business models,” he said.
Gensler said reform was needed. “Markets are increasingly hidden, especially for individual investors,” he said. “This is in part because there is not a level playing field between the different parts of the market: wholesalers, dark pools and lit exchanges.”
Separately, 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 automatic sales of shares that adhere to trading rules. with privileged information.
The 90-day deadline would put an end to a controversial practice in which executives sell shares within days of drawing up a plan, raising suspicions that they may have acted with privileged 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”.