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WASHINGTON/NEW YORK (Reuters) – Wall Street’s regulator is about to announce rule changes that would force trading firms to directly compete to execute trades from retail investors in a bid to boost competition for orders and improve deals for retail investors, according to four industry sources.
Gary Gensler, the chair of the U.S. Securities and Exchange Commission, will make the announcement on Wednesday, the sources said.
The potential rule changes by the SEC, which Reuters first flagged as forthcoming in March, will be focused in part on ensuring order-by-order competition for retail investors’ orders, the sources said.
The proposal will include an SEC definition of “best execution” requirements that would force retail brokers to send their customers’ orders to auctions, run by exchanges or off-exchange trading venues, which would allow market participants to compete to trade against the orders, the sources said.
An SEC spokesperson declined to comment.
Currently, retail brokerages can send customer orders directly to a wholesale broker to be executed, as long as the broker is matching or bettering the best price available on U.S. exchanges. Gensler has criticized this model as limiting competition for retail orders.
The potential rule changes also seek to scrutinize the practice of payment-for-order-flow (PFOF), in which some brokers, like TD Ameritrade, Robinhood (NASDAQ:HOOD) Markets and E*Trade, are paid by wholesale market makers for orders, said the sources, who spoke on condition of anonymity to discuss private agency plans.
Retail orders are required to be executed at the best publicly displayed price on an exchange, or better. Large market-makers typically improve on the best price by a fraction of a cent.
Gensler is expected to lay out this agenda in a Wednesday speech, which will also detail more potential rule changes, including reducing trading size increments on exchanges to allow them to better compete with off-exchange trading venues, according to the sources.
Gensler told Reuters in March he wants to ensure brokers execute orders at the best possible price for investors – the highest price for when an investor is selling, or the lowest price if they are buying.
The proposed rules, which Gensler will announce via an online speech to an industry audience in New York, are expected as early as July, but more likely this fall, the sources said.
The moves could lead to the biggest shake-up of U.S. equity market rules in over a decade by fundamentally altering the business model of wholesalers, which can make more money by executing retail investor orders internally than they do on public exchanges, where they might find themselves trading with other sophisticated trading firms or institutional investors.
“It’s great to see the SEC taking a holistic approach to this problem – there’s not a single answer, we need changes to different parts of the market,” said Dave Lauer, CEO of financial platform Urvin Finance.
“We need an order-by-order standard for best execution and open competition for order flow in order to provide the best outcomes for retail investors. This will force greater competition, and could help to end the off-exchange oligopoly that has controlled that market for too long,” he added.
Investor advocates want to boost exchanges’ competitiveness to improve the reliability of the national pricing benchmark, known as the National Best Bid and Offer (NBBO).
They also wish to see the SEC boost disclosures from exchanges and market makers around pricing.
