SEC Chief Calls for Review of Stock Trading Rules

Securities and Exchange Chairman Gary Gensler has ordered agency staff to review current agency rules governing equity market trading.

In prepared remarks for the Global Exchange and Fintech Conference, Gensler said he asked staff for recommendations on best execution, Regulation NMS (National Market System), payment for order flow on and off exchange, minimum pricing increments and the National Best Bid and Offer (NBBO).

“We are often relying on rules written in an earlier period,” Gensler said. “Rules mostly adopted 16 years ago do not fully reflect today’s technology … It’s appropriate to look at ways to freshen up the SEC’s rules to ensure that our equity markets reflect our mission: to maintain fair, orderly, and efficient markets, while ensuring we protect investors and facilitate capital formation.”

Gensler noted that only a little more than half the trading volume occurred on major public markets like the Nasdaq and the New York Stock Exchange in January and most of the remaining trades (38%) were executed by off-exchange wholesalers, primarily just seven of them. Moreover, one firm, Citadel Securities, said it executed nearly half of those off-exchange trades, according to a footnote in Gensler’s remarks.

Such market concentration “can increase potential system-wide risk should any single incumbent with significant size or market share fail,” said Gensler. Nine percent of January trades were executed on alternative trading systems known as dark pools.

For retail investors, there’s the risk of not getting the best execution for their trades when wholesalers pay brokers for order flow or when trading apps like Robinhood use behavioral prompts, known as gamification, to encourage investors to trade more. Investors, however, may not notice those risks or excess trading costs in the current zero-commission brokerage environment, according to Gensler.

“Do broker-dealers have an inherent conflict of interest?” asked Gensler. “Are broker-dealers incentivized to encourage customers to trade more frequently than is in those customers’ best interest?”

Brokers also “must consider among other factors, prices currently being quoted,” said Gensler, adding that the NBBO that wholesalers reference “is not a complete enough representation of the market,” in that it doesn’t doesn’t reflect trades in dark pools by wholesalers, which can affect bid-ask spread.

On a more positive note for brokers and their investors, Gensler said there is now the technology to shorten trade settlement cycles “not only to T+1 but even to same-day settlement — T+0.” (The T represents the day of the transaction.) He said shortening the settlement cycle could reduce costs and risks in the market.