The Securities and Exchange Commission (SEC) voted to advance four proposals that would bring about major changes to the ways the U.S. stock market functions. The main purpose of these proposals is to ensure more transparency and fairness while encouraging competition for individual investors’ stock orders. Last year’s meme stock frenzy made the SEC come up with these proposals.
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As per the Wall Street Journal, Democratic commissioners holding three of the SEC’s five seats voted to go ahead with each of the four proposals. However, Republican commissioners objected to two proposals. These proposed changes will now be put up for public comment until at least March 31, 2023, following which the regulator will move to finalize the rules, subject to approvals by the commissioners.
SEC’s Order Competition Rule
One of the key proposals (called the order competition rule) requires individual investors’ marketable stock orders to be sent to auctions to ensure that they are executed at the best possible prices. The SEC noted that currently retail brokers direct over 90% of these orders to a small group of off-exchange dealers, also called wholesalers. These wholesalers, like Citadel Securities and Virtu Financial (VIRT), generally execute the marketable orders internally, without allowing other market participants to compete to provide better prices.
Per Reuters, SEC Chair Gary Gensler commented, “The competitive shortfall could be worth about $1.5 billion annually, compared with current practice — money that could go back into retail investors’ pockets.”
Reacting to the proposed rule, Citadel Securities stated that “any proposed changes must provide demonstrable solutions to real problems while avoiding unintended consequences that will hurt American investors.”
A WSJ report mentioned some interesting opinions of Chester Spatt, a former SEC chief economist and currently a finance professor at Carnegie Mellon University, about the proposed order-by-order auctions. Spatt feels that investors could benefit from order-by-order auctions in the case of actively traded stocks. That said, fewer firms will participate in the auctions in case of less popular stocks, which could result in a worse price than what an investor could get in the existing system.
To summarize, while the SEC seems determined to implement these rules, it may face opposition from certain parties, mainly wholesale brokerages.
