Gensler says SEC to review payment for order flow

The top US stock market regulator is looking to change the rules around share trading, including fees paid by large Wall Street groups to handle customers’ orders, after January’s explosion in “meme stocks” highlighted what he called “inefficiencies” in the market.

Gary Gensler, chair of the Securities and Exchange Commission, said on Wednesday that he had asked the agency’s staff to make recommendations to amend a host of market structure rules — an announcement that sent shares in the trading company Virtu Financial down 7.7 per cent.

The review will cover the controversial issue of payment for order flow, in which retail brokerages receive fees from market makers such as Virtu and Susquehanna to handle their trades. In return they promise to execute the trade at, or at better than, current market prices.

The SEC would also look at apps that encourage “gamification” of trading through email alerts, prompts and moving images to entice investors, Gensler said.

“The question is whether our equity markets are as efficient as they could be in light of the technological changes and recent developments,” he said at a conference held by Piper Sandler in New York.

Many of the issues came to the forefront of regulators’ and policymakers’ attention in January, when day traders swapping ideas on the social media site Reddit and using the trading platforms Robinhood drove shares in GameStop and other companies dramatically higher.

The outsized moves drew attention to payment for order flow and the dominance of one group, the privately held Citadel Securities, which executes nearly half of all retail trades in the US. Virtu is the second-largest market maker.

New rules could also have implications for the business models of brokerages — not least Robinhood, which is readying an initial public offering — because the payment for order flow that they receive subsidies zero-commission equity trading for customers.

“Brokers profit when investors trade,” Gensler said. “For those brokers who have these arrangements — and not all do — higher trading volume generates more payment for order flow. What makes the current zero-commission brokerage environment different is that investors do not see their costs as they’re executing trades, so they may perceive them as free.”

In a statement after Gensler’s remarks, Robinhood said it “looks forward to engaging with the SEC through its formal rulemaking process as it considers changes to the current market structure, which is working so well for an increasingly diverse universe of investors”.

Gensler had expressed concern about payment for order flow on several occasions since becoming SEC chair in April, but his comments on Wednesday suggested he intended to follow through with a full review of market structure.

He indicated staff would also look at minimum pricing increments for stocks and the rules that ensure customers get the best possible price for their deals, enshrined in a system known as the National Best Bid and Offer.

He also questioned whether the US system for ensuring that customers got the best price was sufficiently comprehensive since existing rules do not cover deals done on banks’ internal trading books and private marketplaces known as dark pools.

The SEC chair backed calls to cut the time it takes to settle US equity trades from the current two days, after some market participants, including the retail brokerage Robinhood, cited it as a critical factor in decisions to restrict trading in some meme stocks in January.

“I’m reminded of an old saying in the markets,” Gensler said. “Time equals risk.”