Published: Oct. 28, 2022 at 9:04 a.m. ET By Alexander Osipovich Paul Kiernan 1 Proposal reflects plan for broad changes in how small investors’ orders are handled U.S. Securities and Exchange Commission (SEC) Chair Gary Gensler testifies before the Senate Banking, Housing, and Urban Affairs Committee, on Capitol Hill, September 15, 2022 in Washington, DC. KEVIN DIETSCH/GETTY IMAGES Referenced Symbols HOOD +3.05% SCHW +3.70% VIRT +1.16% The U.S. Securities and Exchange Commission’s planned overhaul of stock-trading rules seeks to ensure that small investors get better prices when buying or selling stocks. One of the SEC’s aims is to increase the likelihood that investors get the midpoint price on trades—halfway between the publicly displayed buying and selling price—or better. A proposal under consideration by the agency would generally require brokers to route small investors’ market orders into auctions, where trading firms would compete to execute them, people familiar with the matter said. SEC Chairman Gary Gensler first floated the idea of such auctions in June. The auction requirement would apply to orders less than $200,000 by customers who average fewer than 40 trades a day, the people said. The ideas are part of a package of proposals to revamp stock-market structure that the SEC is expected to roll out in the coming months. Gensler called for the changes after last year’s trading frenzy in GameStop Corp. and other meme stocks, saying he wanted to promote greater efficiency and transparency in the market. Currently, brokerages such as Robinhood Markets Inc HOOD, +3.05% and Charles Schwab Corp. SCHW, +3.70% send most retail market orders to a handful of giant electronic trading firms such as Citadel Securities and Virtu Financial Inc VIRT, +1.16%. These trading firms, known as wholesalers, typically execute those orders somewhere between the bid and ask price. Wholesalers often pay brokers for the right to handle investors’ orders—a controversial practice called payment for order flow. They earn a profit for buying shares for slightly less than they sell them for. Wholesalers might execute an investor’s order at the midpoint, but there is no direct requirement for the broker to seek such a price. Gensler has also said he wants the SEC to introduce a “best execution” rule, which would toughen brokers’ obligations to seek out the best available prices for their customers. He has pledged to tackle several other areas, including “tick sizes”—the price increments in which stocks are quoted and traded—and disclosures of payment for order flow. Wall Street lobbying groups, electronic-trading firms and brokerages are likely to push back against any significant rule changes. Some executives say the industry will likely sue in court to block the SEC’s proposed regulations—meaning the proposals could be years away from becoming reality, if ever. A number of exchanges and off-exchange trading platforms offer midpoint-trading mechanisms that allow buyers and sellers to meet halfway between the bid and the ask price. The SEC’s proposal is aimed at pushing brokers to scour the marketplace for such midpoint opportunities, instead of sending orders to electronic-trading firms willing to pay for the order flow. Brokerages and trading firms counter that small investors often get midpoint executions under the current system. Schwab has said that it delivers midpoint or better prices on more than 50% of market orders.
They could start with the obvious injustice of allowing some participants to trade at sub-pennies while others cannot.
How about getting off this $ .05 minimum on index options. Why not have the $.01 tic size that we have on stock options. This change is long overdue
Route them into auctions? How about just routing them to exchanges like it was designed to be done all along? Instead of trying to make the middle man between your broker and the exchange play fair just get rid of the middle man. They are solving a problem that already has a solution. It's the reason no serious trader uses TD or some other pay-for-order-flow broker.
%%\ Great thing about capital markets; you could do that market making if you really wanted to. WHO wants to make tight spreads in a low or lower volume market??
Exactly. Spreads are already a result of market forces. If leaving a bid or ask on the order book so that others can decide to take it or leave it is such a good idea then step right up. Everyone is allowed to play the game.
We could allow you to do that today. Please give us a call at 718-709-4925 and we can explain how. But this ability is available as we speak for stocks above $1 here at TradeZero