The Securities and Exchange Commission on Wednesday was set to vote on a package of rule changes, including measures that could affect, but not block, the controversial practice known as payment for order flow.
Brokers send many small orders from retail investors to computerized, off-exchange market makers, who compensate the brokers for the order flow. The brokerage industry argues that the practice, which is banned in several countries, offers a net saving to investors, allowing for zero-commission trades and otherwise lowering costs.
The SEC has argued that the practice doesn’t offer as much benefit to investors as it should. One measure up for a vote on Wednesday would require brokers to auction small orders to market makers, who would compete to offer the best execution.
The proposal would require marketable orders of individual orders to be exposed to competition on an order-by-order basis in qualified auctions before being internalized off-exchange. Auctions would apply to marketable orders made
by or on behalf of persons making trades of less than $200,000 and trade on
average fewer than 40 times a day.
The proposal “is designed to bring greater competition in the marketplace for retail market orders. Right now, a concentrated group of wholesalers earns significant revenues from this market,” said SEC Chair Gary Gensler, in a written statement. “They’re willing to pay for this order flow, but as the release notes, investors may not be getting the benefit of full competition in this market, despite the attractiveness of their orders.”
The competitive shortfall “could be worth about $1.5 billion annually, compared with current practice — money that could go back into retail investors’ pockets or portfolios,” Gensler said.
Another proposal would allow stock exchanges to execute trades in increments of less than a penny. The proposal aims to level the playing field between exchanges and off-exchange market centers, who can execute trades at narrower increments.
Other proposals are aimed at enhancing reports on how well orders are being executed and setting a best execution standard and accompanying framework for broker-dealers.
Separately, the SEC voted 5-0 to approve new measures that would apply to executive officers and other corporate insiders trading in their own company’s shares. The new measures will require insiders to wait up to four months after adopting a trading plan before they can act on it.
See: SEC to update insider-trading rules with new cooling-off period of up to four months
The measures being discussed Wednesday would be subject to lengthy public-comment periods.