In recent years, exchanges such as Robinhood and Charles Schwab have allowed users to buy and sell stocks online with no transaction fees – helping to create an army of millions of armchair investors with the power to move the markets.
But new regulations teased by the US Securities and Exchange Commission have raised questions about the future of the fee-free business model and are sparking a raucous debate on Wall Street over whether such changes are really necessary.
SEC Chairman Gary Gensler said Wednesday that he wants to make trading fairer and more transparent for ordinary investors.
He outlined possible market plumbing reforms that could make this possible.
One area of focus was the complex web of stocks that are triggered when you buy or sell a stock. The process appears to be instantaneous. In reality, it is much more complicated.
Robinhood, or your broker of choice, takes your order to a company known as a wholesaler or market maker.
These are the middlemen who must get the best price and who pay brokers for the privilege of referring them to lots of trades. They typically earn pennies with every transaction.
This process is known as “pay by order flow”. He’s been under intense scrutiny from regulators following the fallout from the January 2021 rush on meme stocks like GameStop.
GameStop’s frenzy “exposed how US stock markets are manipulated to enrich big Wall Street firms, high-frequency trading firms and brokers at the expense of Main Street retail investors,” Dennis Kelleher, CEO of Better Markets — a non-profit organization designed to protect Americans from the excesses of Wall Street — he wrote at the time.
The SEC has been overhauling the system, which accounts for most of how exchanges like Robinhood make money.
Gensler said on Wednesday that the agency is considering whether to add more mid-tier competition to ensure retail investors are indeed getting the best prices.
In this scenario, orders would be forwarded to auctions where trading companies would have to compete to execute them.
“It’s not clear … that our current national market system is as fair and competitive as possible for investors,” Gensler said.
The conclusion: this all gets too technical. But Wall Street is warning that the consequences of such moves could be huge, and that fee-free trading could be a victim of the SEC’s potential overhaul.
Robinhood shares fell 4% on Wednesday (8). They are now down 53% year-to-date. Charles Schwab shares, which fell 22% in 2022, are down nearly 3%.
“Retail investors, in particular, enjoy the greatest access and lowest investment cost they have ever experienced,” the Securities Industry and Financial Markets Association, a lobbying group, said in a statement.
“Changes that could affect these costs, by eliminating low or zero commissions or limiting order fulfillment locations, should be closely analyzed and subject to a robust cost-benefit analysis.”
Speaking at the same conference as Gensler, Robinhood Chief Legal Officer Dan Gallagher said he feels the SEC is presenting “a solution looking for a problem.”
“It’s a very good climate for retail, so going in and messing with that right now, for me, is a little worrying,” he said.
But Kelleher of Better Markets said Gensler’s proposed reforms were “reasonable” and “modest” and would build essential public trust in the functioning of markets. He issued a warning: “Don’t believe the weeping billionaires.”
“The financial companies that benefit most from today’s rigged markets are already complaining about the president’s actions and even claim that his proposals will hurt retail investors,” Kelleher said.
“But seriously, who are you going to believe?”
Source: CNN Brasil
I’m James Harper, a highly experienced and accomplished news writer for World Stock Market. I have been writing in the Politics section of the website for over five years, providing readers with up-to-date and insightful information about current events in politics. My work is widely read and respected by many industry professionals as well as laymen.
