Gary Gensler’s bid to overhaul rules for the stock market is reigniting a longstanding debate over how good mom-and-pop investors really have it and whether anything Wall Street is selling is actually free.
Some industry insiders say it’s never been better to be a small-time trader. Buying and selling shares is cheap and easy, they say.
But, Gensler, the chair of the US Securities and Exchange Commission, argues the $45-trillion US equities market is actually littered with hidden costs and rife with conflicts-of-interest. There’s a “lack of a level playing field,” the SEC chief said on Wednesday.
The two sides are headed for a major clash and one issue is already taking center stage: the future of commission-free trading.
Since 2019 most major online brokerages haven’t charged retail clients fees for their transactions, following a model made popular by Robinhood Markets Inc. A legion of traders who put money in the market for the first time during the Covid-19 pandemic have known nothing else.
According to some executives, the lack of commissions is a direct result of Robinhood and other retail brokerages bringing in revenue from arrangements known as payment-for-order flow, which let them sell their clients’ trade orders to market-making firms like Citadel Securities and Virtu Financial Inc. for execution.
Larry Tabb, director of market structure research at Bloomberg Intelligence, said that there’s evidence that retail investors are getting a better deal than institutional traders in the current system, which involves payment-for-order flow.
But Gensler is not a fan because while a trade may be free, there are questions over the quality of the execution and whether an investor is getting the best price. He’s repeatedly suggested ending the practice and this week he again refused to rule out pushing to ban it in the US. The SEC chief also suggested creating an auction mechanism where the major market-making firms would have to compete directly to fill retail orders, rather than purchasing them from Robinhood and others.
While any changes would take months to make their way through the SEC’s byzantine rule-making process, Gensler’s latest comments nonetheless have unleashed a flurry of speculation over what an overhaul could mean for commission-free trading.
“This could be much worse for retail investors, especially if payment-for-order flow goes away and retail traders go back to paying $5 or more for each trade,” said Mike Bailey, director of research at wealth-management firm FBB Capital Partners. “If the SEC kills payment-for-order flow, then yes, commissions go higher and friction comes back into part of the capital markets.”