When the GameStop stock trading frenzy of early 2021 morphed into a widely-watched story about the fairness — or the perceived lack of it — to retail investors trying to play the stock market, threats of recession, hot inflation and bear markets were far away.
But after Securities and Exchange Commission Chairman Gary Gensler unveiled a slew of possible reforms on Wednesday related to the ways trades get carried out, retail investor advocates say the changes are no less necessary.
In fact, even if today’s volatile economic and investing mood is different, these possible changes might be even more important, they say.
“I don’t think there’s any question that [Gensler’s] proposals would lower cost and increase access for retail investors, particularly in these markets,” said Dennis Kelleher, president and CEO of Better Markets, an advocacy organization seeking more transparency, accountability and oversight in financial markets.
To back up, the potential reforms — which are not yet formalized SEC regulation proposals — grew out of the twists and turns of the meme stock mania of winter 2021. As GameStop GME, -7.20% shares climbed in a short squeeze, outrage grew when brokerages like Robinhood HOOD, -3.22% temporarily restricted buys.
The popular zero-commission stock trading platform had to halt purchases to meet collateral requirements, its CEO Vlad Tenev, told federal lawmakers at a later hearing.
The trading frenzy shined a light on questions including whether retail traders were getting the best terms for their trades, and the role of the market makers that actually execute the retail orders, such as Citadel Securities. It also held the concept of “payment for order flow” up to scrutiny, where market makers pay for the privilege of brokers sending trade orders their way.
There’s too much concentration in this wing of Wall Street and too little transparency, Gensler said. Payment for order flow “can raise real issues around conflicts of interest,” he said.
Among other ideas, Gensler says he’s asking SEC staff to recommend rules that might make retail brokerages put their orders to an auction process and have market makers bid on them. “This may be through open and transparent auctions or other means, unless investors get midpoint or better prices,” Gensler said, noting options exchanges have already been using auctions.
“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. I think we can do better here for retail investors,” Gensler said in his speech Wednesday, noting he was offering his own views and not speaking for anyone else at the agency.
In volatile times, share prices can swing quickly and there can be wide spreads between the buy side and the sell side, Kelleher said.
The intermediary firms between the buyer and seller and culminating the trade can stand to profit in the wider gap, he noted — but more transparency and competition will drive down costs, seen or unseen, in no-commission platforms.
The changes are technical, but put together, Kelleher said they “are going to lower the cost and increase access for retail traders.” The proposals are “entirely reasonable,” “modest” and critical at safeguarding faith and trust in the country’s markets, he said.
“It’s great to see the SEC taking a holistic approach to market structure problems. There’s not a single answer; we need changes to different parts of the market,” said We The Investors, a group of individual investors with corporate partners including Public.com, an investing platform that does not accept payment for order flow.
“We need an order-by-order standard for best execution and open competition for order flow in order to provide the best outcomes for retail investors,” the group noted.
On the other hand, Citadel Securities said it backed “any initiatives that further strengthen competition and transparency. We will review the detailed proposals and engage with the SEC and other industry leaders to help ensure any changes accomplish these important goals and translate into lower costs and better execution for retail investors and the market as a whole.”
“American retail investors enjoy one of the most efficient, low cost investing environments in history,” said Dan Gallagher, Robinhood’s chief legal, compliance and corporate affairs officer.
The brokerage’s zero-commission model has “saved investors billions” and helped bring a younger, more diverse demographic to the world of investing and wealth creation, he said. “We look forward to reviewing the Commission’s eventual rule proposal and engaging with the SEC during a meaningful notice and comment rulemaking process.”