Simon Dawson | Bloomberg | Getty Images
Gary Gensler, chairman of the Securities and Exchange Commission, said Tuesday that Wall Street’s top regulator is working to determine whether there is a need for reform or barriers to order flows to ensure a competitive marketplace for trading volume buying and selling.
Gensler acknowledges that modern contracts between brokers and market makers have made trading much cheaper and more efficient than in previous decades, but noted that some worrying conflicts of interest remain.
“Our markets have gone to zero commission, but that doesn’t mean it’s free. There’s still payments under these apps.
Online brokerages that do “free” or zero-commission trading usually make money by selling their clients’ orders to high-frequency market makers who buy and sell. This process is controversial and is known as paying for the flow of orders on Wall Street.
And since only a few couples, including Citadel Securities, handle most trading volumes in the United States, Gensler and other regulators are concerned that they could use their influence to charge brokers extra to run the trade.
Gensler added, “We have had incidents in the last 18 months that we have announced where on the one hand there was this conflict between brokers and on the other hand there was this payment for the flow of orders.”
Some suspect that conflicts of interest have increased “gamification” in securities trading because brokers like Robinhood Securities make more profit when their clients trade more.
“If you place a retail-market order, as shown in this report, most of them do not go to the transparent, illuminated market. They go to the dark market এই these are pools that are not competitive,” Gensler said Tuesday. “So I asked the staff: ‘Can we achieve this simple idea?’ Your order, when you place it, competes with other orders. “
The final decision on how to control payments for order flow is expected to be made in a month, Gensler said, adding that the SEC is considering a variety of options. These include the need for greater disclosure and recognition, a complete ban on practices or other means to increase transparency in the industry.
Washington and Wall Street have similarly blamed gamification on Gamestop, AMC Entertainment and other stocks for violent changes earlier this year.
The SEC on Monday released its long-awaited analysis of Gamestop Mania, saying game-like features have raised concerns about back-end payments that brokers receive, revealing gamification and short sales.
The regulator, however, has stopped blaming the single cause or entity.
“Paying for order flow and the incentives it generates can help brokers find innovative ways to grow customer business, including the use of digital engagement practices,” SEC officials said in the report.
Gensler added Tuesday morning that the SEC is now focusing on conflicts involving short sales, settlement, digital engagement practices and market structure. The commissioners will then weigh in and the agency will make recommendations for public comment, he said.
– Eun Lee of CNBC contributed to this report.