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SEC takes up sweeping overhaul of US stock market


The main US markets watchdog has released the outlines of the most sweeping overhaul of stock trading in more than a decade, with a goal of improving prices for small investors.

Gary Gensler, chair of the Securities and Exchange Commission, said markets were not “as fair and competitive as possible” as he and other commissioners began a meeting on Wednesday to discuss and vote on four rule proposals.

“The markets have become increasingly hidden from view, especially for individual investors,” he added in prepared remarks. “This is in part because there isn’t a level playing field among different parts of the market: wholesalers, dark pools and lit exchanges.”

Taken together, the proposals would produce the biggest changes to US equity trading rules since 2005 by injecting more competition into the business of executing deals for smaller investors.

Among the regulator’s proposed rules, a new auction system would force brokers to offer retail investor orders under $200,000 to a wider group of trading venues. Another, on so-called best execution, would require brokers to document exactly how they had looked at venues to ensure they got the best price.

Currently, the definition of best execution is set by the Financial Industry Regulatory Authority, not the SEC.

“I believe a best execution standard is too important, too central to the SEC’s mandate to protect investors, not to have on the books as commission rule text,” Gensler said.

The proposals have the potential to boost business for stock exchanges by allowing them to offer share prices in fractions of a penny, as off-exchange dark pools and wholesale traders already do.

A surge in trading by retail investors in the early months of the coronavirus pandemic highlighted the practice of payment for order flow, in which retail brokers such as Robinhood were paid by big trading firms such as Citadel Securities to route customers’ orders to them.

While the practice helps brokers offer cut-price or free trading, the SEC fears it may not produce the best prices for clients. The regulator’s research estimates that small investors are out of pocket by as much as $1.5bn annually, or 1.08 cents per $100 traded, because of what it describes as a “competition shortfall”.

Gensler said that in September, off-exchange trading accounted for 42 per cent of all equity dealing volume. Earlier data showed that this share was roughly a third in 2009. As much as 80 per cent of trading for some small-cap stocks recently was away from so-called “lit” venues such as exchanges.

While the SEC’s proposals would not ban payment for order flow, they would likely make it far less appealing for brokers and wholesalers alike.

If a majority of SEC commissioners vote to release them on Wednesday, the proposals will be open for comment until at least March 31.

Commissioners began Wednesday’s meeting by approving a final rule that will force company executives to wait 90 days to sell shares after establishing so-called 10b5-1 plans, which are designed to enable automatic stock sales while adhering to insider trading rules.

The cooling-off period would end a controversial practice in which executives sell stock days after creating a plan, raising suspicion that they may have acted with inside information.

SEC commissioner Hester Peirce said the revised rule would allow insiders “to trade without fear of liability while making it more difficult to misuse the rules”.


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