Gary Gensler has fired his opening shots in his battle to reform stock trading for the benefit of small investors. His ideas would shake up stock exchanges and their wholesale market-making rivals.
In a midday speech Wednesday, the chairman of the Securities and Exchange Commission said he’s asked his staff to consider curbing the rebate payments that bring orders to exchanges and the order-flow payments that bring orders to wholesalers like Virtu Financial (ticker: VIRT) and Citadel Securities.
Gensler has also asked his agency to consider altering current market practices in which brokers like Robinhood Markets (HOOD) and Charles Schwab (SCHW) send many of their customers’ orders to wholesalers. Confirming Monday news reports, Gensler suggested an auction mechanism that could put individual orders out for execution at market makers other than big wholesalers like Virtu.
Shares of Virtu were off 4% in midday trading, at $23.15, compared with a 0.6% drop for the Nasdaq Composite.
The wholesalers say they save billions for retail traders by giving them better stock prices than the “national best bid and offer” posted on exchanges—but Gensler challenged whether the NBBO is a truly competitive measure.
“It’s not clear, given the current market segmentation, concentration, and lack of a level playing field, that our current national market system is as fair and competitive as possible for investors,” Gensler told the Wednesday audience at a Piper Sandler investment conference. “I think we can do better here for retail investors.”
Gensler noted that the ideas in Wednesday’s speech were his own, and not the SEC’s.
The SEC chairman wants the agency to consider defining a stockbroker’s “best execution” responsibilities for the first time in the agency’s history. An explicit definition would affect how brokers choose where to send trades.
Other proposals that Gensler said his staff is considering would affect trade pricing and brokers’ obligations toward clients. Gensler would like to allow price quotes in increments smaller than a penny at stock exchanges like Nasdaq (NDAQ), Intercontinental Exchange (ICE)’s New York Stock Exchange, and venues run by Cboe Global Markets (CBOE). More than half of orders at exchanges encounter this pricing limit, said Gensler, while unconstrained market makers are able to offer sub-penny increments for 37% of their trades.
Gensler also wants the agency to consider speeding up the implementation of an SEC rule that increases the basic information about trading that’s carried on the widely used core stock trade tape. A federal appeals court just rebuffed a challenge to that rule, but it could take years for the rule to be implemented.
Finally, Gensler urged that market makers and brokers be required to publicly report on their trade-execution performance, in an update of 20-year-old rules that has been long advocated by Barron’s and others.
Most of the ideas in Gensler’s Wednesday remarks are positions he’s previously discussed. Opposition to those ideas has been building among industry players, such as the wholesale market makers that get large hunks of their revenue from the status quo.
“It is important to recognize that the current market structure has resulted in tighter spreads, greater transparency, and meaningfully reduced costs for retail investors,” said Citadel Securities in a written 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.”
Virtu Financial CEO Doug Cifu has been outspoken in his defense of the company’s wholesale business, which he says has delivered $13 billion a year in price-improved trades to retail investors. The order-by-order auctions proposed by Gensler would give inferior prices to traders, says the market maker, and haven’t worked well in equity option trading.
“Order-by-order competition enables selective competition because it removes the retail brokers’ ability to demand best execution from wholesalers on every order,” said Cifu. “The SEC should engage all market participants before proposing significant untested changes that would harm retail investors’ execution quality and reduce retail investors’ access to our capital markets.”
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