The SEC is trying to reshape the US stock market, but that could mean a return to paying trade commissions for retail investors
The Securities and Exchange Commission is aiming to upend the mechanics of U.S. stock trading following last year’s meme-stock frenzy, and some market experts say the changes could lead to a return to investors of retail who pay commissions to carry out transactions.
SEC Chairman Gary Gensler in a speech this week outlined six areas of market structure where rules could be updated to foster greater efficiency, especially for retail investors. Gensler suggests the agency consider sending retail stock orders to auctions where trading companies compete to execute the trades to ensure investors receive the best prices.
Such a move could change the Payments for Order Flow, or PFOF, system under which brokerage firms such as Robinhood, TDAmeritrade, and E-Trade are compensated for sending client orders to market makers instead. than sending them directly to a stock exchange. Some of the biggest market makers include Citadel Securities and Virtu Financial. PFOF supports commission-free trading at online brokerages that serve amateur investors.
A significant change to the PFOF “could reset the whole playing field and cost individual investors more money because we’ll have to go back to some sort of commission model,” Sean Bonner, CEO of Guild Financial, an app from self-directed investment that focuses on serving and retired members of the military, Insider said. Guild, a start-up company, does not use the checkout system for order flow.
“I can guarantee you that the commission model will be much higher than rebates paying the payout for much higher order flow, by a factor of 10 to 100,” said Bonner, who is over 20. of Wall Street experience in floor trading. to work as a mutual fund manager. “Retail investors are saving billions of dollars a year over the current order flow payment model.”
Commission-free trading in recent years has fueled a boom in activity among individual investors who no longer had to pay their brokers up to $6.95 for each trade.
Proposed changes to upend US stock market rules were criticized this week by Robinhood chief legal officer Dan Gallagher. “It’s a very good climate for retail, so getting in and getting involved right now, for me, is a little worrying,” Gallagher said at a conference in New York, according to the Wall Street. Log. Retail traders benefit from commission-free transactions and fast trade execution, he said.
PFOF is banned in some countries. Gensler isn’t proposing a ban, but such a move would make it “almost inevitable” for retail investors to return to a commission-based system, Kerim Derhalli, founder and CEO of investing app Invstr, told Insider.
“I don’t think anyone will be willing to provide brokerage services on their own without having some form of associated income,” he said. The Invstr app has 3 million users worldwide and the company does not use the PFOF system.
“If we go back to a commission structure, you could argue that it might discourage people from trading as often as they have. You could, on the other hand, argue that if people start trading less and invest more, they will be better off,” in the long run, he said.
“What would seem like a simple solution would be [for Gensler] to say, “We’re going to make PFOF illegal and retail trading needs to go through the exchange where it’s transparent and prices are transparent and people can have confidence in the system,” Derhalli said.
Guild’s Bonner said overall he sees a PFOF ban hurting retail traders. “To be honest, many brokers are hoping that they will get rid of this order flow payment model and go back to charging commissions because it generates a lot more revenue for brokers.”