WASHINGTON, June 9 - Gary Gensler, the leading U.S. market watchdog, has asked his staff to recommend rules for ensuring fair competition between exchanges and brokers.
The Securities and Exchange Commission rules will address payment-for-order-flow and the best execution among other issues, on Wednesday, told a global conference at Piper Sandler on financial technology and the global markets.
The aim was to make the markets as efficient as possible, Gensler said.
Payment-for order flow, whereby wholesale market makers pay broker dealers to send them client orders that they would make on their own trading platform or a third-party platform, raises a number of question-of-interest questions, said he.
The practice has attracted global scrutiny from regulators. Critics say it creates an incentive for brokers to send orders to what market-maker has the highest fee, rather than the venue that could get the best outcome for customers.
Market-makers say the business model has reduced liquidity and increased costs for average investors.
Will you get the best execution in any given conflict? Are broker-dealers likely motivated to buy more often and to trade only as much as it is in the best interest of the customer? Gensler asked during his speech.
The SEC review follows the Reddit rally from January - fueled by low-cost investors trading on Reddit and trading through low brokerages - drove GameStop and other shares up.
Amid the intense volatility, many brokers restricted trading in the affected stock markets that raised a spotlight on their business models and restricted questions over whether they had prioritized their market-making clients more than their everyday retail customers.
It also highlighted the small number of market-makers that dominate the retail market, with Citadel Securities executing roughly 47% of all American retail volume, according to its own data. This could pose opportunities for competition, Gensler said.
As a significant and growing share of the wholesale orders are routed to a small, concentrated group of retail retailers, certain market makers have more data than others. What exactly is a big phrase, but it comes from the book On a Life Not Affect!