Wall Street's $43-trn stock trading to see major overhaul in over a decade

US regulators took the first step toward the most widespread revamp in more than a decade of the way stocks are traded, a move that aims to spur better prices for investors and direct more business to traditional exchanges.  

The Securities and Exchange Commission laid out four proposals on Wednesday that Chair Gary Gensler says would boost transparency and competition. They delve into the guts of how the $43-trillion market works, and affect everything from order routing to pricing and disclosures that brokers must make to clients.

The SEC’s plans, which a majority of the agency’s five commissioners voted to propose on Wednesday, represent a direct response to many of the issues that were spotlighted by last year’s meme-stock-trading craze. 

On Wednesday, the SEC chief doubled down. “Today’s markets are not as fair and competitive as possible for individual investors — everyday retail investors,” Gensler said. The plans could be adopted separately, but taken together, the changes would be the biggest since 2005. 

Broadly, the plans could lead to more stock orders filled on exchanges like Nasdaq and the New York Stock Exchange. Currently, a significant chunk of retail trades are handled by wholesale brokerages like Virtu Financial Inc. and Citadel Securities, which pay to process customer trades from firms such as Robinhood Markets.

Virtu shares fell as much as 7.5 per cent in New York trading, the biggest intraday decline since April, while Robinhood dropped as much as 4.4 per cent before rebounding.

Michael Blaugrund, chief operating officer at NYSE, said in a statement that the “proposals aim to level the playing field between on- and off-exchange trading.”  Robinhood said the firm would engage with the SEC on its proposal, but that the amount of time the agency is allowing for feedback is “insufficient for the public to meaningfully comment on a package of this size and complexity.”

Gensler has frequently criticised the arrangement, which is commonly known as payment for order flow, as creating conflicts of interest for brokers. 

Backers of payment for order flow say it’s responsible for widespread commission-free trading in the US.  Since 2019, most major online brokerages haven’t charged retail clients fees for their transactions, following a model made popular by Robinhood. 

The proposals would require market participants to engage in auctions for the right to process many orders within milliseconds. That requirement would apply to most market-making firms and major stock exchanges. 

The regulator also wants to reduce the rebates that exchanges can offer brokers in their own bid to pull more trades onto those platforms. Platform operators would have to start making their fees publicly known in advance, rather than after the fact based on volume within a given month.  The SEC estimates that the auctions could save retail investors $1.5 billion annually.  If implemented, the auctions could directly affect market-making firms that have built algorithms and technology to process trades quickly and provide what they say is the best deal for customers. 

Venues would also need to start allowing stocks to trade at smaller price increments on and off exchanges. The move, SEC said, would raise competition to fill orders and lower costs.

FOR A ‘LEVEL PLAYING FIELD’

• The plans could lead to more stock orders filled on exchanges like Nasdaq and the New York Stock Exchange. Currently, a significant chunk of retail trades are handled by wholesale brokerages
• The regulator wants to reduce the rebates that exchanges can offer brokers in their own bid to pull more trades onto those platforms
• Platform operators would have to make their fees publicly known in advance, rather than after, based on volume within a given month
• The agency is also proposing to reduce other fees, which could drive more trading