The Securities and Exchange Commission on Wednesday voted to propose a package of rule changes, including measures that could affect, but not block, the controversial practice known as payment for order flow.n this practice, brokers send many small orders from individual investors to market makers or other venues, who compensate the brokers for the order flow. The brokerage industry argues that the practice, which is banned in several countries, offers a net saving to investors, allowing for zero-commission trades and otherwise lowering costs.
The SEC has argued that the practice doesn’t offer as much benefit to investors as it should.
The proposals advanced on Wednesday could affect market makers and other middlemen.
The commission voted 3-2 to propose a rule that would require marketable orders of individual orders to be exposed to competition on an order-by-order basis in qualified auctions before being internalized off-exchange. Auctions would apply to marketable orders made by or on behalf of persons making trades of less than $200,000 and trading on average fewer than 40 times a day.
The proposal “is designed to bring greater competition in the marketplace for retail market orders. Right now, a concentrated group of wholesalers earns significant revenues from this market,” SEC Chair Gary Gensler said in a written statement. “They’re willing to pay for this order flow, but as the release notes, investors may not be getting the benefit of full competition in this market, despite the attractiveness of their orders.”
The competitive shortfall “could be worth about $1.5 billion annually, compared with current practice — money that could go back into retail investors’ pockets or portfolios,” Gensler said.
Other proposals aimed at enhancing reports on how well orders are being executed and setting a best execution standard and accompanying framework for broker-dealers were also approved.
The best-execution measure would require brokers to seek out markets providing the most favorable terms possible for orders. Brokers are subject to a similar rule by the Financial Industry Regulatory Authority, Wall Street’s self-regulator.
“Today, equities often trade on off-exchange dark venues that have different business models and are less transparent than the familiar lit exchanges. Such developments in our markets make best execution that much more important,” Gensler said.
The SEC approved another proposal that would allow stock exchanges to execute trades in increments of less than a penny. The proposal aims to level the playing field between exchanges and off-exchange market centers, which can execute trades at narrower increments.
An industry group urged caution.
“We strongly believe the SEC needs to be extremely careful in its approach. Any changes being proposed in the name of competition which may tilt the playing field at the expense of investors should be weighed carefully, be subject to a robust cost-benefit analysis, and considered holistically with a view to ensuring there are no negative, unintended consequences for investors,” said Kenneth E. Bentsen, Jr., president and CEO of Sifma, a securities industry trade group.
Others welcomed the measures.
“We believe the reforms announced by the SEC represent a constructive and positive effort to improve transparency, increase competition, and ensure that investors can access the best prices available in the market,” said Ronan Ryan, president and co-founder of IEX Group Inc.
“It has been 17 years since the existing equity rules were adopted, and since that time, the stock market has seen significant change — including the advent of high-frequency trading, a dramatic decline in displayed liquidity on exchange, and a substantial rise in off-exchange trading. Modernizing regulation ensures that market competition among brokers, market makers, and exchanges continues to benefit investors,” he said.
The proposals are subject to a period of public comment.
Separately, the SEC voted 5-0 to approve new measures that would apply to executive officers and other corporate insiders trading in their own company’s shares. The new measures will require insiders to wait up to four months after adopting a trading plan before they can act on it.
https://www.msn.com/en-us/money/savingandinvesting/sec-votes-to-propose-major-overhaul-of-us-stock-trading-rules/ar-AA15gDsd ....
This is interesting. While they don't mention specifics, I would wonder if this applies to ETFs (exchange traded funds). As well as some of the known loopholes which exist in the way ETFs transact trades. Which make them a sought after vehicle for investment.
More new and big changes loom on the horizon. Will these adjustments improve circumstances for investors and the economy? I would be curious to know what people think about this.
Would anyone consider the current trading format of stocks to be broken? If so, what reforms would they propose to address current flaws? It appears that the SEC is beginning a campaign of their own to reform the way stocks are traded in the united states. From this short article, one might guess what some of the long term implications could be.
If anyone wants a hint as to what this might mean, think about the gamestop incident and retail traders. As it is entirely possible that this latest overhaul could be at least partially in response to that.
