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US SEC Director Gary Gensler reveals plans to overhaul Wall Street stock trading

U.S. Securities and Exchange Commission (SEC) Chairman Gary Gensler testifies before the Senate Banking, Housing and Urban Affairs Committee’s supervisory hearing on the SEC on Capitol Hill in Washington, Wednesday. September 2021.

Evelyn Hockstein | Swimming Pool | Reuters

The top U.S. securities regulator on Wednesday proposed rule changes to change the way Wall Street handles retail stock trades after last year’s stock meme craze raised questions. Ask about whether new investors are getting the best price.

The plan, unveiled by US Securities and Exchange Commission Chairman Gary Gensler, would require companies dealing in direct competition to take deals from retail investors to promote competition. .

The Wall Street watchdog plans to scrutinize the controversial payment for order flow, or PFOF, in which some brokers, such as TD Ameritrade, Robinhood Markets and E*Trade, are authorized Wholesale market makers pay for orders.

Gensler told an industry audience on Wednesday: “I asked employees to take a holistic, multi-market view of how we can update our rules and drive greater efficiency across the board. our stock market, especially for retail investors.”

He said the new SEC rules would require market makers to disclose more data about the fees these firms earn and trading times for the benefit of investors.

Gensler’s announcement, the biggest US stock market rule change in more than a decade, is likely to lead to formal proposals this fall. The public can then weigh in on them before the SEC vote to accept them.

The changes are expected to fundamentally alter a wholesaler’s business model. They can also affect brokers’ ability to offer commission-free trading to retail investors. Reuters first marked the reforms in March.

PFOF came under regulatory scrutiny last year when an army of retail investors began buying “meme stocks” like GameStop and AMC, squeezing hedge funds that had sold stocks short. Many investors have purchased stocks using commission-free brokers like Robinhood.

The new rules will increase competition in the order, including through potentially “open and transparent” auctions, intended to offer investors better prices. These will include a dealer-specific definition of so-called best practice for stocks and other securities to ensure brokers and investors benefit from more detail on standards. standard procedures that brokers must meet when processing and executing client orders.

They will require broker-dealers and market centers to disclose more execution quality data to the benefit of investors, including monthly summaries of price improvement and metrics. other statistics, Gensler said.

The rules will also seek to scale down the minimum price increment aka tick size to better accommodate forex activity and harmonize tick sizes to ensure all trades take place with increased ticks. minimum.

Wholesale overhaul

The proposed rule changes would include the SEC’s definition of “best execution” requirements that would force retail brokers to submit their clients’ orders to auctions, run by exchanges exchanges or operating forex trading venues, which would allow market participants to compete to trade orders, the sources said.

Currently, retail brokers can send client orders directly to a wholesale broker for execution, as long as that broker matches or exceeds the best price available on the exchanges. US transactions. The major market makers often improve the best price by a fraction of a cent. Gensler has criticized this model as restricting competition for retail orders.

The rules would require retail brokers to send PFOF customers’ orders to the wholesaler offering the best deal, rather than the order that pays the most.

This will fundamentally change the business model of wholesalers, which can make more money by executing retail investors’ orders internally than they can on the Internet. public exchanges where they may find themselves dealing with other sophisticated trading companies or institutional investors.

Gensler told Reuters in March that he wanted to make sure brokers executed orders at the best possible price for investors – the highest price when investors sold or the lowest price if they bought.

“It is great to see the SEC taking a holistic approach to this – there is no single answer, we need changes,” said Dave Lauer, CEO of financial platform Urvin Finance. for different parts of the market”.

“We need an order-to-order standard for best execution and open competition for the order flow to deliver the best results for retail investors. This will foster greater competition and could help end the foreign exchange monopoly that has controlled that market for so long,” he added.

Investor advocates want to strengthen exchanges’ competitiveness to improve the reliability of the national pricing standard, known as National Best Bid and Bid (NBBO).

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