Businesshala News Exclusive | SEC Closes In on Rules That Could Reshape How Stock Market Operates

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Chairman Gary Gensler is expected to outline ideas for improving market efficiency on Wednesday.

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SEC employees have floated tentative plans with market participants in recent weeks, and Gensler plans to elaborate on some of the potential changes in a speech on Wednesday, these people said.

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The most commonly discussed resultant change is the way trades are handled after an investor places a so-called market order with a broker to buy or sell a stock. Market orders, which account for most individual investors’ trades, do not specify a minimum or maximum price that the investor is willing to pay.

Mr Gensler has said that he wants to ensure that brokers execute orders at the best possible price for investors – the highest price when an investor is selling, or the lowest price if they are buying.

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Current regulations require brokers to perform “due diligence” to determine the best possible market for executing a trade. Many brokers place orders to large electronic trading firms called wholesalers, including Citadel Securities or Virtu Financial. Inc.,

Instead of exchanges like the Nasdaq stock market,

Arguing that wholesalers provide the best prices.

Some brokers including Charles Schwab Corporation

and Robinhood Markets Inc.,

Accept compensation from wholesalers for routing trades to their locations. Mr Gensler has said that this practice, known as pay for order flow, creates a conflict of interest and limits competition for individual orders.

Under the auctions being considered by the SEC, different firms will compete with each other to fill out the individual investor’s business, according to people familiar with the agency’s plans. Such an arrangement would fundamentally change the business model of wholesalers, who could make more money by trading against smaller investors than they would have done on public exchanges, where they would trade themselves with other sophisticated trading firms or institutional investors. can do business.

An SEC spokesperson declined to comment.

Several Wall Street firms pushed back forcefully last year when it became clear Mr Gensler was targeting his business model. Wholesalers and brokers increased their lobbying and campaign spending in Washington and published their plans for stock market reform.

Notably, Virtu and Citadel Securities have argued against the changes being considered by the SEC. They say that the current system, including payment of order flows, has led to a massive reduction in trading costs which has made the stock market more accessible.

Virtu chief executive Douglas Sifu said the order-by-order competition sought by Mr Gensler could allow trading firms to choose which trades to fill. This may be more profitable in the short term for wholesalers, he said, but it may not necessarily help investors.

“The SEC must involve all market participants before proposing significant untested changes that would harm the execution quality of retail investors and reduce retail investors’ access to our capital markets,” said Mr.
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A spokesperson for Citadel Securities said the firm looks forward to reviewing the SEC’s proposals and working with the agency.

“It is important to recognize that the current market structure has resulted in tighter spreads, greater transparency and meaningfully lower costs for retail investors,” the spokesperson said.

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And in early 2021 other mem stocks received fresh scrutiny over their handling of individual investors’ trades.

After a year of internal deliberations, the agency has focused on a narrow set of proposals. If the SEC votes to release them for public comment later this year, they will have a path to implementation, as Democrats hold the majority of seats on the commission.

Two people said the agency is also looking at creating a more stringent version of the so-called best-performing rule that instructs brokers to find the most favorable terms for their clients. The regulation that brokers currently follow was written by the Financial Industry Regulatory Authority, an industry body that oversees the SEC.

The SEC is also considering a proposal to allow stock exchanges to quote shares in increments of less than 1 percent. This could enable places such as the Nasdaq or the New York Stock Exchange to better compete with wholesalers, which could beat publicly displayed prices on exchanges by adding or subtracting one-hundredth of a penny to the stock price. Two people familiar with the matter said the agency is also looking at an idea for reconciliation of price increases, known as tick sizes, that are available on exchanges elsewhere.

In addition, SEC officials aim to reduce the maximum fees that exchanges can charge brokers to access their quotes, the two people said. Like some of the other changes under consideration, such a move could encourage exchanges to send more orders to other locations instead.

Paul Kiernan at [email protected] and Alexander Osipovich at [email protected]

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