Securities and Exchange Commission Chairman Gary Gensler has outlined some major changes to U.S. stock trading rules the SEC is considering to protect retail stock traders.
These new rules could have significant impacts on the business models of popular online brokerages, including Robinhood Markets Inc HOOD and Charles Schwab Corporation SCHW.
What Happened: At the Piper Sandler Global Exchange and Fintech Conference on Wednesday, Gensler described a new requirement for brokers to submit retail investor orders to a new auction process through which firms will bid against each other to fill them.
"The markets have become increasingly hidden from view," Gensler said.
“I’ve asked staff to make recommendations for the commission’s consideration around how to enhance order-by-order competition," Gensler said Wednesday. "This may be through open and transparent auctions or other means.”
Gensler said exchange rebates also create conflicts of interest in today's markets.
"On the order-by-order competition, what I've asked the staff to focus on for retail market orders, how can we inject more order competition?" Gensler said.
In terms of a potential timeline for enacting the changes, Gensler said any official proposals from the SEC will be open for public debate, and his speech on Wednesday is not official SEC policy.
Why It's Important: Today, when Robinhood and other online brokers receive orders to buy and sell stocks and options, they often route those orders to electronic market-making firms to execute them. In exchange for those orders, the market makers often pay brokers a rebate, a process known as payment for order flow, or PFOF.
More than 70% of Robinhood's total revenue in the first quarter of 2022 came from PFOF, which some investors, and even Gensler himself, see as a conflict of interest.
PFOF came under intense public scrutiny in 2021 during the so-called meme stock trading frenzy. When Robinhood temporarily restricted buying of stocks like GameStop Corp. GME and AMC Entertainment Holdings Inc AMC, traders speculated that market maker Citadel Securities, one of Robinhood's largest PFOF customers, was responsible. Both Robinhood and Citadel deny any such communication took place.
The changes Gensler described Wednesday could mean retail investors will be getting better prices on their trades in the near future. It could also mean brokerages like Robinhood will be forced to go back to charging trading commissions if they lose their primary source of revenue.
Benzinga's Take: Shares of Robinhood rallied off their lows following Gensler's speech because the SEC chair made clear the regulator is seemingly a long way from an official policy change that would ban PFOF.
Gensler repeatedly emphasized that any potential rule changes are only ideas at this point, that he was not speaking on behalf of the SEC or its other commissioners and that any rule changes will be open to public debate and discussion.
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