SEC Chair Gensler Looking Into How Stock Trading Incentives Are Structured

SEC

U.S. Securities and Exchange Commission (SEC) Chairman Gary Gensler is looking for an audit into the laws regulating the U.S. stock market, including best execution requirements, The Wall Street Journal (WSJ) reported on Wednesday (June 9).

Following the meme stock rallies, the rules governing the market are now getting closer scrutiny, including how wholesale brokerage firms — such as Citadel Securities and Virtu Financial — operate in partnership with retail brokers to finalize trader orders.

“Brokers profit when investors trade,” Gensler said in a speech at the Piper Sandler Global Exchange & FinTech Conference, per WSJ.

“For those brokers who have these arrangements — and not all do — higher trading volume generates more payment for order flow. What makes the current zero-commission brokerage environment different is that investors do not see their costs as they’re executing trades, so they may perceive them as free,” Gensler said, according to WSJ.

The SEC is in the midst of mulling rule changes regarding how U.S. stocks are traded and what pricing incentives are used to entice orders, Gensler said at the conference. He also outlined a wider probe into the market structure. Gensler has already questioned why investment orders are typically sent to big wholesalers instead of public exchanges, per the news outlet. 

“The question is whether our equity markets are as efficient as they could be, in light of the technological changes and recent developments,” Gensler said at the conference, per WSJ. 

The SEC is already looking into the surging prices surrounding meme stocks such as AMC and GameStop. Goldman Sachs, Citigroup, Bank of America and Jefferies Financial Group are just some of the banks and brokerages looking into risk controls at prime-brokerage operations.

The SEC is also examining special purpose acquisition companies (SPACs) and how investors can be better protected. Gensler submitted written testimony to the U.S. House Appropriations Committee last month that indicated stronger protections are necessary. At the end of May, about 118 traditional initial public offerings (IPOs) were filed, compared to just 138 for the entire year of 2016.

Gensler said earlier in May that the agency wants to know how retail broker apps promote stock trading and profit when trades are executed. He said there could be a conflict of interest and indicated that gamification could be at work in the apps.