The US Securities and Exchange Commission (SEC) wants to strengthen competition between brokerage houses and help small investors to get better conditions for stock transactions. SEC Chairman Gary Gensler unveiled a reform plan at a trade meeting that would lead to the biggest changes in the US stock market in more than a decade. A formal reform proposal from the authority is expected in the autumn.
The core of the reform should be a competition among trading houses for every order from small investors. The brokers would therefore have to forward the buy or sell orders to auctions organized by stock exchanges or other trading venues. There, market participants would compete for the best deal. So far, brokers have been able to use the so-called Payment-for-Order-Flow (PFOF) to route orders from small investors directly to large trading houses, which process them provided the price is at least as good as the official stock exchange price. In return, the brokers receive rebates or payments. Gensler has criticized this in the past as an obstacle to free competition.
Best course or highest compensation?
Regulators fear that orders will not be routed to those offering the best price, but rather the highest rebates. The practice is already banned in the UK, Canada and Australia. It has “inherent conflicts,” said SEC boss Gensler. He noted that even without PFOF, some brokers did not charge any fees from customers.
The background to the discussion is, among other things, conflicts over so-called memes, such as the shares of the US video game retailer Gamestop. In early 2021, Robinhood restricted trading after some hedge funds gambled. This aroused the suspicion that manipulation was being carried out here.
Shareholder representatives welcomed the plans. “There are too many in the financial industry today who thrive on anti-competitive and predatory practices in highly fragmented markets,” said Dennis Kelleher of the advocacy group Better Markets. As a result, small investors are “treated badly, if not ripped off”. Industry representatives, on the other hand, were skeptical. “We’re talking about how jealous the world is of our markets,” said Joseph Mecane of Citadel Securities. “We have to be very careful not to unintentionally return to a time when things looked even worse than they are today.”
Robinhood’s chief legal officer, Dan Gallagher, was also defensive about Gensler’s plans. The share of the trading app, which is used primarily by young small investors, had already suffered price losses on Tuesday after the Wall Street Journal had reported on the project to the SEC. Robinhood’s commission-free model has “saved billions” for investors and opened up the stock market to many small investors, Gallagher said.
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