In the FT, Philip Stafford reports on a review of a number of issues currently facing markets, including payment for order flow. He writes:
The top US stock market regulator is looking to change the rules around share trading, including fees paid by large Wall Street groups to handle customers’ orders, after January’s explosion in “meme stocks” highlighted what he called “inefficiencies” in the market.
Gary Gensler, chair of the Securities and Exchange Commission, said on Wednesday that he had asked the agency’s staff to make recommendations to amend a host of market structure rules — an announcement that sent shares in the trading company Virtu Financial down 7.7 per cent.
The review will cover the controversial issue of payment for order flow, in which retail brokerages receive fees from market makers such as Virtu and Susquehanna to handle their trades. In return they promise to execute the trade at, or at better than, current market prices.
The SEC would also look at apps that encourage “gamification” of trading through email alerts, prompts and moving images to entice investors, Gensler said.
“The question is whether our equity markets are as efficient as they could be in light of the technological changes and recent developments,” he said at a conference held by Piper Sandler in New York.
Many of the issues came to the forefront of regulators’ and policymakers’ attention in January, when day traders swapping ideas on the social media site Reddit and using the trading platforms Robinhood drove shares in GameStop and other companies dramatically higher.
The outsized moves drew attention to payment for order flow and the dominance of one group, the privately held Citadel Securities, which executes nearly half of all retail trades in the US. Virtu is the second-largest market maker.
New rules could also have implications for the business models of brokerages — not least Robinhood, which is readying an initial public offering — because the payment for order flow that they receive subsidies zero-commission equity trading for customers.
Read more here.