The main US markets watchdog has proposed the most sweeping stock trading reform in nearly two decades, aiming to improve prices and transparency for retail investors.
Gary Gensler, chairman of the Securities and Exchange Commission, said Wednesday that the measures outlined in more than 1,500 documents will “enhance competition and benefit investors and institutional investors every day.” But the plans have led to opposition from the market maker companies that control the system.
Taken together, the proposals represent the biggest changes to US equity trading rules since 2005, transforming the business of executing deals for retail investors.
The agency’s focus on the inner workings of the U.S. stock market has been renewed after the pandemic lockdowns prompted a burst of activity from investors.
That fueled a dramatic surge in the price of popular meme stocks like GameStop and AMC last January — and some brokers imposed temporary trading restrictions, preventing more investors from getting in, sparking a firestorm of trading. Washington politicians.
The most controversial of the regulator’s proposed rules is a new auction system that would require brokers to submit retail orders for large trading positions of less than $200,000.
Another recommendation, called Best Performance, would require brokers to accurately document how they view positions to ensure they are getting the best price for their clients.
Currently, the definition of best performance is set by the Financial Industry Regulatory Authority, not the SEC.
Gensler, a Democrat appointed by President Joe Biden, said: “I believe that a better level of enforcement is essential to the SEC’s mandate to protect investors, not the text of a commission regulation on the books.”
The proposals have the potential to boost stock exchanges by allowing them to offer share prices at pennies, as dark pools and wholesalers do.
The president of the IEX exchange, Ronan Ryan, supported the reforms, calling it a “constructive and positive effort to improve transparency, increase competition and ensure that investors get the best prices on the market.”
The meme stocks incident highlighted a pay-for-order flow system in which large firms like Citadel Securities and Virtu Financial buy client orders from retail brokerages like TD Ameritrade and Robinhood instead of going directly to the stock market.
While experience has helped large brokers offer retail investors discounted retail rates or free trades, the SEC is concerned that they may not be getting the best deals for clients. The regulator’s study estimates small investors will be out of pocket $1.5 billion a year, or 1.08 cents per $100, due to what it describes as a “lack of competition.”
Gensler said over-the-counter trading accounted for 42 percent of total equity trading volume in September. According to the data before 2009, this share was approximately one third.
While the SEC’s proposals would not prohibit fees for order flow, they would make it less attractive to brokers and wholesalers.
Citadel Securities, the market’s largest market maker, said: “The US equity market is the envy of the world, and any proposed changes must provide practical solutions to real problems while avoiding unintended consequences that hurt American investors.”
Shares in Virtu, the second-largest group and one that opposes Gensler’s proposed reforms, fell 6.4 percent on Wednesday. Virtue declined to comment.
A majority of the SEC’s five commissioners voted for each of the proposals, but two opposed the bid and best execution plans. Hester Pearce, a Republican commissioner, said the regulator “has a habit of trying to manage the markets, and that habit is on full display today.”
Proposals will be open for comment until at least March 31. Steve Sosnick, chief strategist at Interactive Brokers, predicted a “very determined” response from many groups. “They’re competing with people’s business models,” he said.
Gensler says reform is needed. “The markets are more hidden from view, especially for individual investors,” he said. “This is partly because there is not a level playing field between the different parts of the market: wholesalers, dark pools and light exchanges.”
Separately, commissioners began Wednesday’s meeting after the company’s executives set up a so-called 10b5-1 plan that requires them to have 90 days to sell stock, which would allow automatic stock sales to comply with insider trading rules.
The 90-day period ends the controversial practice of executives selling shares days after creating a plan, raising suspicions that they may have dealt with insider information.
Pearce offered some details about some of the insider trading reforms, but said they would “do more good than bad” and allow insiders to “trade without fear of liability while making it more difficult to abuse the rules.”
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