Wednesday, the U.S. Securities and Exchange Commission voted to propose some of the most significant changes to the structure of the American equity market in nearly two decades, with the goals of enhancing transparency and fairness while increasing competition for stock orders from individual investors.
The SEC said the ideas include sending marketable retail stock orders to auctions prior to execution, a new standard for brokers to demonstrate they obtain the best possible executions for customer orders, and lower trading increments and access costs on exchanges.
Joe Saluzzi, co-manager of trading at Themis Trading, stated, "We believe that, if approved, these improvements will ultimately aid the price discovery process and save investors' money."
Allowing orders to interact with one another, as opposed to segmenting them, will increase competition and result in lower pricing.
The SEC stated that exposing individual investor orders that may be performed immediately to competitive auctions could result in "substantially" better rates for investors. Currently, retail brokers send the majority of these orders to wholesale brokers, sometimes for a fee.
"The competitive gap might be worth nearly $1.5 billion annually, compared with present practice - money that could go back into regular investors' pockets," said SEC Chair Gary Gensler.
The reforms, if implemented, would represent the largest shakeup to stock market rules since the SEC introduced the Regulation National Market System in 2005, which was meant at modernizing and strengthening an increasingly fragmented and primarily computerized economy.
Ronan Ryan, president and co-founder of exchange operator IEX Group Inc said the measures were a "constructive and good attempt to promote transparency, increase competition, and ensure that investors can get the lowest rates available in the market."
Since the adoption of the current equity rules 17 years ago, the stock market has seen tremendous change, including the introduction of high-frequency trading, a drastic drop in displayed liquidity on exchange, and a substantial increase in off-exchange trading, according to Ryan.
"Modernizing regulation ensures that market competition among brokers, market makers, and exchanges continues to benefit investors.”
The order competition rule, which would require marketable retail orders to be sent to auctions, could lead to more such orders being matched on exchanges, like the Nasdaq or Intercontinental Exchange (NYSE:ICE) Inc's New York Stock Exchange, rather than by wholesale brokers, like Citadel Securities and Virtu Financial (NASDAQ:VIRT) (NASDAQ:VIRT).
Nasdaq said it believes in "transparent, fair, efficient, competitive and inclusive markets and that it looks forward to evaluating the SEC’s ideas.
In a statement, Citadel Securities stated, "any suggested adjustments must give demonstrated remedies to real problems while avoiding unintended repercussions that would harm American investors."
Firms that benefit from the existing quo, such as wholesalers and retail brokers that receive payments from them, would certainly challenge the SEC’s plans, said Stephen Hall, Better Markets' Legal Director and Securities Specialist.
"It is vital that the SEC reject industry pressure, thoroughly evaluate all stakeholder feedback, and approve a set of rules that will finally assist investors in getting a better bargain on Wall Street," Hall said.
The SEC also decided to recommend requiring brokers to submit additional information on the quality of their customer trades, while also expanding the number of firms that must file the order execution reports.
The proposed amendments will be open for public comment until at least March 31, after which the regulator will decide to finalize the rules.
The regulator also agreed to expand disclosures around the trading of business shares by insiders, such as executives and directors, that have earned equity-based pay.
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