SEC Chief Wants Fair-Play Rules for US Brokers and Exchanges

He is mostly concerned about the conflict of interest with the rise of the payment-for-order-flow model.

The Securities and Exchange Commission (SEC) staff has received a new order from Chairperson, Gary Gensler to draft new capital market rules that will ensure fair competition between exchanges and brokers, Reuters reported.

Speaking at a virtual conference on Wednesday, organized by Piper Sandler, Gensler revealed the regulator’s aim to make the equities fair, especially after the embracement of new market models.

Gaps in the Market

His primary concern was to bring rules around the controversial ‘payment-for-order-flow’, ‘best execution’ and the ‘national best bid and offer’.

The payment-for-order-flows model was brought to light by stock market disrupter Robinhood, which makes money by routing trade orders to large private trading platforms in exchange for fees, thus offering commission-free services to the traders.

Though the model looks good for the traders at a glance, there are major concerns of conflict of interest. The broker might send the order to the trading platform that offers the best fees but not the best execution.

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“Are customers getting best execution in the context of that conflict? Are broker-dealers incentivized to encourage customers to trade more frequently than is in those customers’ best interest?” Gensler asked.

The US regulator slapped a $65 million civil penalty to Robinhood last year for concealing its payment-for-order-flow model and not offering the best execution to a number of traders.

The latest Reddit group-pumped demand for GameStop and a few other stocks have further blown up the shortcomings of the current market structure in place.

“Market concentration can deter healthy competition and limit innovation. It also can increase potential system-wide risks, should any single incumbent with significant size or market share fail,” he added.

Meanwhile, many brokers like Public.com have steered away from the controversial payment-for-order-flow model, but the market disrupter Robinhood is still clinging to the model.

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