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SEC Chairman Gary Gensler

Regulation and Compliance > Federal Regulation > SEC

SEC Chief Takes Aim at Payment for Order Flow in Sweeping Plans for Stock Markets

By Lydia Beyoud and Katherine Doherty

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What You Need to Know

  • Gensler said he’d asked staff to weigh changes with the aim of making the equities market more transparent.
  • If enacted, the plans could mark the biggest overhaul for the U.S. stock market in more than 15 years.
  • Gensler asked SEC staff to consider creating an order-by-order auction mechanism.

Wall Street’s top regulator previewed a set of sweeping overhauls to the rules underpinning the U,S. stock market, setting up a major clash with some of the biggest names in equity trading.

Securities and Exchange Commission Chair Gary Gensler said he’d asked the agency’s staff to weigh changes with the aim of making the equities market more transparent and fair for retail investors. His plans could directly impact how brokerages including Citadel Securities, Virtu Financial Inc. and Robinhood Markets Inc. process many retail trade orders.

The possible changes outlined by Gensler would require two votes by the agency’s commissioners to take effect. If enacted, the plans could mark the biggest overhaul for the U.S. stock market in more than 15 years, and the agency’s most direct response yet to last year’s wild trading in GameStop Corp. and other meme stocks.

“Right now, there isn’t a level playing field among different parts of the market: wholesalers, dark pools, and lit exchanges,” Gensler said in remarks prepared for an event hosted by Piper Sandler. “It’s not clear, 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.”

In what would be one of the most significant changes, Gensler asked staff to consider creating an order-by-order auction mechanism intended to help retail traders obtain the best pricing for their orders. The structure would draw on practices now in place in the options market.

Gensler rattled financial firms last year when he refused to rule out prohibiting the practice of brokers getting paid to send customers’ stock orders to market makers as part of the agency’s rule changes. Currently, firms including Virtu and Citadel Securities pay retail brokerages to execute their clients’ trades, a practice known as payment for order flow.

While the SEC chief stopped short of calling for an outright ban on the practice, Gensler said he’s asked staff to find ways “to mitigate” conflicts of interest that he says are inherent to the arrangements. He floated the idea of tweaking rules to make trading on exchanges, rather than through market makers, more attractive.

Other key changes Gensler said he’s asked staff to consider for the first time include having the SEC define directly what it means for a broker to give its clients “best execution” to satisfy agency requirements.

Earlier this year, the agency proposed new measures to increase transparency in short sales and decreasing the amount of time it takes for stock trades to settle.

The SEC chief didn’t say when he expects the SEC to release any of the proposals he suggested. If a majority of the commissioners vote to propose the plans, they would be released for public comment and the agency would then hold another vote months later to finalize the regulations after taking into account the feedback.

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