SEC Chair Gensler Floats Potential Changes to Market Trading Rules
Commentary by Steven Lofchie
In a speech before the Piper Sandler Global Exchange Conference, SEC Chair Gary Gensler floated a wide variety of possible changes to market trading rules.
Mr. Gensler questioned whether "given the current market segmentation, concentration, and lack of a level playing field, that our current national market system is as fair and competitive as possible for investors." Mr. Gensler stated that the proposed changes are the result of "a holistic, cross-market view of how we could update our rules and drive greater efficiencies in our equity markets, particularly for retail investors." The suggested changes include:
- allowing bids and offers on the exchanges to be generally quoted in sub-penny increments;
- providing that the national best bid and offer include quotes for odd lots amounts;
- increasing the amount of information regarding order execution quality that broker-dealers are required to provide to customers;
- having the SEC adopt specific procedural requirements as to "best execution" rather than relying on FINRA's more open-ended policy based rule; and
- further regulating or perhaps even prohibiting payment for order flow.
Additionally, Mr. Gensler said that he wanted to increase "order-by-order competition." He stated that "this may be through open and transparent auctions or other means, unless investors get midpoint or better prices." He said he asked staff to make recommendations.
Commentary
As a general matter, the changes would have the effect of potentially driving trades in securities, particularly trades initiated by retail investors, to the national securities exchanges rather than being internalized by a broker-dealer (or sent by the firm receiving the retail order to a market maker that sent "payment for order flow" to the firm that had received the order).
The question is whether these changes would result in better market prices that are sufficient to offset the higher commissions that retail investors would presumably pay if payment for order flow is reduced or eliminated.