By Katanga Johnson and John McCrank
WASHINGTON (Reuters) – Gary Gensler, the top watchdog for US markets, has asked his staff to recommend rules to ensure fair competition between exchanges and brokers.
Securities and Exchange Commission (SEC) rules would address the flow of order payments and best execution, among other topics, he said at a virtual conference on financial technology and global markets at Piper Sandler on Wednesday.
The goal was to make the markets as efficient as possible, Gensler said.
The pay-per-order flow, whereby wholesale market makers pay brokers to send them orders from clients that they execute on their own trading platform or on a third-party platform, raises a number of issues of conflict. interest, he said.
The practice has attracted scrutiny from regulators globally. Critics say it creates an incentive for brokers to send orders to whichever market maker pays them the highest fees, rather than the place that could get the best result for clients.
Market makers say the business model has increased liquidity and lowered costs for average investors.
“Are clients getting the best execution in the context of that conflict? Are brokers incentivized to encourage clients to trade more frequently than is in the best interest of those clients?” Gensler asked during his speech.
The SEC’s review follows the January Reddit rally, fueled by retail investors coordinating on Reddit and trading through low-cost brokers, fueled GameStop (NYSE 🙂 and other stocks.
Amid the intense volatility, many brokers restricted trading in affected stocks, highlighting their business models and raising questions about whether they had prioritized their market-making clients over their day-to-day retail clients.
It also highlighted the small number of market makers dominating the retail market, with Citadel Securities running roughly 47% of all US-listed retail volume, according to its own data. That could raise competition concerns, Gensler said.
“With a significant and growing portion of retail orders going to a small, concentrated group of wholesalers, certain market makers have more data than others.”
Fusion Media or anyone involved with Fusion Media will not accept any responsibility for loss or damage as a result of reliance on information, including data, quotes, charts, and buy / sell signals contained on this website. Be fully informed about the risks and costs associated with trading the financial markets, it is one of the riskiest forms of investment possible.