By Katanga Johnson and John McCrank
WASHINGTON (Reuters) -Gary Gensler, the leading U.S. markets watchdog, has asked his staff to recommend rules for ensuring fair competition between exchanges and brokers.
The Securities and Exchange Commission (SEC) rules would address payment-for-order-flow and best execution among other issues, he told a virtual conference on financial technology and global markets at Piper Sandler on Wednesday.
The aim was to make markets as efficient as possible, Gensler said.
Payment-for-order flow, whereby wholesale market makers pay broker-dealers to send them client orders which they execute on their own trading platform or a third-party platform, raises a number of conflict-of-interest questions, he said.
The practice has drawn scrutiny from regulators globally. Critics say it creates an incentive for brokers to send orders to whichever market-maker pays them the highest fees, rather than the venue that might get the best outcome for customers.
Market-makers say the business model has increased liquidity and reduced costs for average investors.
“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 during his speech.
The SEC review follows January’s Reddit rally – fueled by retail investors coordinating on Reddit and trading through low-cost brokerages – drove up GameStop and other shares.
Amid the intense volatility, many brokers restricted trading in the affected stocks, which shone a spotlight on their business models and raised questions over whether they had prioritized their market-making clients over their everyday retail clients.
It also highlighted the small number of market-makers that dominate the retail market, with Citadel Securities executing roughly 47% of all U.S.-listed retail volume, according to its own data. That could pose competition issues, said Gensler.
“As a significant and growing share of retail orders are routed to a small, concentrated group of wholesalers, certain market makers have more data than others.”
(Reporting by Katanga Johnson in Washington and John McCrank in New YorkEditing by Michelle Price, Chizu Nomiyama and Howard Goller)
