In a recent speech, Gary Gensler, chair of the US Securities and Exchange Commission (SEC), addressed a number of deficiencies that have been identified in the US trading system – providing suggestions on how these issues could be resolved.
In particular, Gensler provided recommendations to update key aspects of national market system rules including improving minimum tick sizes, National Best Bid and Offer, disclosure of order execution quality, best execution and order-by-order competition.
“Right now, there isn’t a level playing field among different parts of the market: wholesalers, dark pools, and lit exchanges. Further, the markets have become increasingly hidden from view… It’s not clear, with such market segmentation and concentration, and with an uneven playing field, that our current national market system is as fair and competitive as possible for investors,” said Gensler.
Gensler’s proposals have been met with a mixed response from industry participants, particularly from those who believe the new changes might actually harm retail investors.
Speaking to The TRADE Doug Cifu, chief executive of Virtu Financial, said: “The SEC should engage all market participants before proposing significant, untested changes that would harm retail investors’ execution quality and reduce retail investors’ access to our capital markets.”
In addition, Cifu highlighted how Gensler’s proposals to promote as much competition as possible for retail investors on an order-by-order basis could risk benefits that retail investors currently gain.
Gensler has called for recommendations to enhance order-by-order competition, which may be through open and transparent auctions or other means, unless investors get midpoint or better prices.
“Order-by-order competition enables selective competition because it removes the retail brokers’ ability to demand best execution from wholesalers on every order,” highlighted Cifu. “While this may enhance wholesaler profitability, it risks an estimated $13 billion/yr in price and size improvement benefits that retail investors enjoy today.”
Another area Gensler focused on in his speech was the National Best Bid and Offer (NBBO); a quote designed to aggregate information across different exchanges, providing investors with important pre-trade transparency. The NBBO currently includes round lots, which are quotes for 100 shares or more. Gensler noted that retail investors, who are more likely to buy or sell at odd lot prices, are unable to see these prices.
Gensler proposed the acceleration of the Market Infrastructure Rule – a rule that created a new round lot definition, which, depending upon share price, can be anywhere between 1 and 100 shares. The SEC chair proposed an acceleration of the rule in the hope that it would allow retail investors to see better prices sooner.
But Cifu warned that: “The SEC should carefully examine how the auction-based market in options has weakened the options NBBO before proposing rule changes that mimic the options markets.”
Speaking holistically on the proposed changes by Gensler, Cifu concluded that: “The entire market will be evaluating any proposal to ensure it complies with the rulemaking requirements, aligns with the SEC’s mandate, and includes complete economic and competitive analysis.”
Elsewhere, the brokerage industry has been exploring alternatives to payment for order flow (PFOF) following Gensler’s proposed changes to the practice. Gensler has called for recommendations on how the SEC can mitigate conflicts with respect to payment for order flow and rebates.
Players such as Apex Clearing – which handles trades for fintechs including SoFi and Webull – have been building a marketplace for matching customer orders. The move could potentially allow stock exchanges to compete directly with market makers such as Virtu, creating more competition and translating into better prices for retail investors.