The main watchdog for US markets has proposed the most sweeping overhaul of stock trading in nearly two decades in an effort to improve prices and transparency for small 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 retail and institutional investors.” But his plans provoked resistance from the market-making companies that dominate the system.
Taken together, the proposals would produce the The biggest changes to US stock trading rules Since 2005, reshaping the business of executing deals for retail investors.
The agency’s focus on the inner workings of the US stock market was revived after pandemic lockdowns led to an explosion of consumer activity.
That culminated in the dramatic increases in the prices of popular meme stocks, such as GameStop and AMC, last January, and the imposition of temporary trading restrictions by some brokers to prevent more investors from accumulating. The trade disruptions drew criticism from politicians in Washington.
The most contentious of the regulator’s proposed rules is a new auction mechanism that would force brokers to offer orders from retail investors to a broader group of trading venues if they are less than $200,000.
Another proposal, called best execution, would require brokers to document exactly how they looked at venues to ensure they received the best price for their clients.
Currently, the definition of best execution is established by the Financial Industry Regulatory Authority, not by the SECOND.
“I think a best execution standard is too important, too central to the SEC’s mandate to protect investors, not to have it on the books as commission rule text,” said Gensler, a Democratic presidential nominee. Joe Biden.
The proposals have the potential to boost the business of stock exchanges by allowing them to offer share prices in fractions of a cent, just as off-exchange dark pools and wholesale dealers 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.”
The meme stock incident highlighted the practice of order flow payment, in which large trading firms like Citadel Securities and Virtu Financial buy customer orders from retail brokers like TD Ameritrade and Robinhood, rather than going directly to the Stock market.
While the practice helps big brokers offer retail investors a reduced price or free trade, the SEC fears it won’t lead to the best deals for clients. The regulator’s investigation estimates that small investors have out-of-pocket costs of up to $1.5 billion a year, or 1.08 cents for every $100 traded, due to what it describes as a “competitive shortfall.”
Gensler said that, in September, over-the-counter trading accounted for 42 percent of all stock trading volume. Earlier data from 2009 showed that this share was about a third.
While the SEC’s proposals would not prohibit payment for order flow, they would likely make it far less attractive to both brokers and wholesalers.
Citadel Securities, the market biggest market makerHe said: “The US stock market is the envy of the world, and any proposed changes must provide demonstrable solutions to real problems and avoid unintended consequences that will hurt American investors.”
Shares of Virtu, the second largest group and a vocal opponent of Gensler’s planned reforms, fell 6.4 percent on Wednesday. Virtu declined to comment.
A majority of the five SEC commissioners voted in favor of each of the proposals, but two voted against the auction and best execution plans. Hester Peirce, a Republican commissioner, said the regulator “has a habit of trying to micromanage markets, a habit that I think is on full display today.”
Proposals will be open for comment 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 have become increasingly hidden from view, especially for individual investors,” he added. “This is partly because there is not a level playing field between the different parts of the market – wholesalers, dark pools and enlightened 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, which are designed to allow automatic sales of shares that adhere to insider trading rules.
The 90-day period would end a controversial practice in which executives sell shares days after creating a plan, raising suspicions they may have been insider trading.
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 and make it more difficult for people to misuse rules”.
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