The chair of the Securities and Exchange Commission has outlined plans for an overhaul of what he described as an “uneven” and unfair US equity market, drawing fire from traders that have flourished under the current system.
Gary Gensler said on Wednesday that he had asked agency staff to consider a series of significant changes, including a possible auction process to increase competition between services for retail investors.
His push comes after a gradual fracturing of the stock market, with a rising share of trading taking place outside of traditional exchanges.
Retail investors’ participation in markets also grew over the past two years, with wholesale trading groups in some cases paying brokers for batches of retail orders in what is known as “payment for order flow”.
“It’s not clear . . . that our current national market system is as fair and competitive as possible for investors. I think we can do better here for retail investors,” he told a conference hosted by investment bank Piper Sandler.
Gensler repeatedly stressed that the plans were still at a preliminary stage and that the regulator would listen to concerns.
But in a warning to the industry, he added: “We’re representing 330mn Americans, you’re representing . . . frankly, your revenues. We might have a different perspective.”
The most radical proposal in the speech was the introduction of “order-by-order competition”, possibly including auctions, to decide which trading firms would handle orders from retail investors. Currently, more than 90 per cent of retail trades are sent to a small group of wholesale traders.
The suggestions prompted immediate pushback from the trading industry. Douglas Cifu, chief executive of market maker Virtu Financial, said the SEC had provided no proof that the existing system was not working.
“All you have is innuendos and hearsay. The burden is on the regulator to provide data that proves there is a problem for investors, and factually they can’t,” Cifu said.
Joe Mecane, head of execution services at Citadel Securities, warned that “small changes can have very big impacts on the market that are difficult to anticipate”.
“Everyone agrees that retail has an unbelievably good experience in the US, so it’s important to make sure any changes don’t bring the market backwards.”
Wholesalers promise to provide investors with a slightly better price than market quotes, but Gensler said “price improvement without competition . . . isn’t necessarily the best price improvement”, with trading firms potentially “saving more than they’re passing along to investors”.
Gensler dodged questions about whether the plans would lead to a complete ban on payment for order flow, but did say he had asked staff “to make recommendations around how we can mitigate conflicts [of interest]” created by the model.
Other plans outlined in the speech included harmonising the increments in which stocks can be traded to less than a penny across different types of trading venue, and developing a “best execution” rule dictating how brokers decide to carry out customers’ orders.
Brokers follow guidance from the Financial Industry Regulatory Authority and the Municipal Securities Rulemaking Board, which are self-regulatory organisations. The SEC does not have its own best execution rule.
Gensler also suggested brokers may have to file monthly public reports on the quality of their order execution as exchanges and wholesalers do, to make it easier for customers to compare the quality of different brokers.
