The U.S. Securities and Exchange Commission today approved a sweeping package of proposals to overhaul stock trading, with the intention of improving stock prices and transaction costs for small investors.
SEC Chairman Gary Gensler said the markets were not “as fair and competitive as possible,” and maintained that the proposed changes would increase transparency and competition in trading and save investors as much as $1 billion a year. SEC staff, however, admitted during a public meeting today that the new requirements may save individual investors only one cent per share.
If approved, the proposals would produce the most dramatic changes to U.S. equity trading rules since 2005. One proposal would require open auctions for equity orders under $200,000.
The proposal seeks to increase greater competition and improve rules for “best execution”—the legal requirement that brokers take care to get the best terms to execute a customer’s order. Gensler noted that best execution is currently controlled by the Financial Industry Regulatory Authority. But he said the standard is too important for the SEC’s mandate that the agency not have a version on its own books.
The proposal for best execution would not replace Finra’s rule but complement it, an SEC staffer said.
Another proposal would set detailed requirements for broker-dealers and other market participants regarding their payment for order flow, which allows broker-dealers to sell customer orders to the brokerage that offers the highest payment, without regard to how competitive share prices are for retail investors.
The proposal would require firms to document and disclose how they find the most favorable stock price for customers and what factors the firm considers when making determinations about which firms to use.
A trading surge by retail investors during the early days of the pandemic magnified the problems with the practice of payment for order flow. The trading platform Robinhood offered zero-commission trading without disclosing that it was being paid by big trading firms such as Citadel Securities to route customer orders its way.
Without admitting or denying guilt, Robinhood agreed in December 2020 to pay $65 million to settle SEC charges that it failed to disclose the payment of order flow and failed to satisfy its duty for best execution.
The requirements proposed today would set guardrails and significantly increase disclosure requirements so investors could see how much their broker-dealer is being paid to route trades, and firms would be required to review their execution quality quarterly.
“The proposals should improve oversight and investor outcomes,” said SEC Commissioner Caroline Crenshaw.
The Securities Industry and Financial Markets Association, the trade group for broker-dealers and large banks (also known as SIFMA), called the package “incredibly complex” and urged the SEC to exercise caution.