What SEC Chairman Gensler’s plan to streamline payment for order flow means for everyday investors

When the frenzy of GameStop stock trading morphed into a widely publicized story about fairness — or perceived lack of it — for retail investors trying to gamble in the stock market in early 2021, the dangers of a recession, hot inflation, and bear markets were far away .

But after Securities and Exchange Commission Chairman Gary Gensler on Wednesday unveiled a range of possible reforms to how trades are conducted, retail investor advocates say the changes are no less necessary.

While today’s volatile economic and investment sentiment is different, these possible shifts could be even more important, they say.

“I don’t think that’s not a question [Gensler’s] Proposals would reduce costs and increase access for retail investors, particularly in these markets,” said Dennis Kelleher, President and CEO of Better Markets, an advocacy group dedicated to increasing transparency, accountability and oversight in financial markets.

To back this up, the potential reforms — which are not yet formalized SEC regulatory proposals — have emerged from the twists and turns of winter 2021’s meme-stock mania. As a GameStop GME,
Stocks rose quickly, outrage grew as brokerage firms like Robinhood HOOD,
temporarily restricted purchases.

The popular commission-free stock trading platform had to halt purchases to meet collateral requirements, its CEO Vlad Tenev told federal lawmakers at a later hearing.

The trading frenzy shed light on questions including whether retailers were getting the best terms for their deals, and the role of the market makers who actually fill the retail orders, such as: B. Citadel Securities. It also challenged the concept of “pay for flow,” whereby market makers pay for the privilege of brokers sending trades to them.

There’s too much focus in this wing of Wall Street and not enough transparency, said Gensler. Paying for order flow “can pose real conflict-of-interest issues,” he said.

Among other things, Gensler says he is asking SEC officials to recommend rules that could encourage retail brokers to put their orders through an auction process and have market makers bid on them. “This may be done through open and transparent auctions or otherwise, unless investors are getting mid or better prices,” Gensler said, noting that options exchanges have used auctions before.

“It is not clear that our current national market system is as fair and competitive as possible given the current market segmentation, concentration and lack of a level playing field for investors. I think we can do better here for retail investors,” Gensler said in his speech on Wednesday, noting that he was presenting his own views and not speaking for others at the agency.

During periods of volatility, stock prices can fluctuate rapidly and there can be large spreads between the buy and sell sides, Kelleher said.

The firms that mediate between buyers and sellers that culminate the trade could benefit from the wider gap, he noted – but more transparency and competition will visibly or invisibly lower costs on commission-free platforms.

The changes are technical in nature, but overall, Kelleher said they will “reduce costs and improve access for retailers.” The proposals are “completely reasonable”, “modest” and crucial to maintaining faith and trust in the country’s markets, he said.

“It’s great to see the SEC taking a holistic approach to market structure issues. There is no single answer; We need changes in different parts of the market,” said We The Investors, a group of individual investors with corporate partners including, an investment platform that doesn’t accept payment for flow of orders.

“We need an order-by-order standard for best execution and open competition for order flow to provide retail clients with the best results,” the group noted.

On the other hand, Citadel Securities said it supports “any initiative that further strengthens competition and transparency. We will review the detailed proposals and work with the SEC and other industry leaders to ensure any changes achieve these important goals and translate into lower costs and better execution for retail investors and the market at large.”

“American retail investors enjoy one of the most efficient and cost-effective investing environments in history,” said Dan Gallagher, Robinhood’s chief legal, compliance and corporate affairs officer.

The brokerage firm’s zero-commissions model has “saved billions for investors” and helped bring a younger, more diverse demographic into the world of investing and wealth-making, he said. “We look forward to reviewing the Commission’s final rule proposal and collaborating with the SEC for notices and comments during a meaningful rulemaking process.” What SEC Chairman Gensler’s plan to streamline payment for order flow means for everyday investors

Brian Lowry

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