Citing flaws in stock market trading exposed in last year’s GameStop saga, a top US securities regulator on Wednesday endorsed a major overhaul of the stock market trading system.
In a speech heralded as the first step in a possible update to the rules that could anger financial firms, Gary Gensler, chairman of the Securities and Exchange Commission, said he advocated restructuring the system to better protect retail investors.
“It’s not clear … that our current national market system is as fair and competitive as possible for investors,” Gensler said in a virtual address at a conference hosted by Piper Sandler.
The speech marks the SEC’s latest action in response to frenzied trading in early 2021, when extreme volatility in GameStop, AMC Entertainment and a handful of other stocks rocked the market, prompting brokers to impose sudden trading restrictions that angered investors and spurred congressional investigations .
Gensler said the current system routes “the vast majority” of stock trade orders to wholesale electronic traders such as Citadel Securities and Virtu Financial.
In some cases, these firms pay brokerage fees, an arrangement known as “order flow payment” that can allow brokerage firms like Robinhood Markets to offer commission-free trades to individual investors.
However, Gensler is skeptical that this arrangement protects retail investors and believes the system of paying for order flow creates conflicts of interest and encourages “gamification” on online platforms to increase trading volume.
Gensler has asked SEC officials to consider steps to “improve contract competition,” possibly through auctions. He has also asked staff for recommendations to mitigate the risks involved in paying for the flow of orders and provide more transparency.
The SEC chief described the speech as a starting point for possible regulation, which will involve extensive public comment and discussions with other SEC commissioners.
Doug Cifu, chief executive of Virtu, disputed Gensler’s characterizations and told CNBC that most broker-dealers his firm trades do not accept payment for order flow.
“The Chairman, with all due respect, links the issue of order flow payment to the ecosystem that has developed in this country for retail, which has truly enabled retail investors to receive instant execution and essentially zero commission for 8000 listed names “, Cifu said.
“You know, the cliché that markets have never been so good is factually correct.”
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