Back in October, Sen. Pat Toomey—who will not, it turns out, be succeeded in his seat by former Bridgewater Associates CEO David McCormick but either by a celebrity heart surgeon or by a six-foot-nine guy with heart problems—was getting quite worried that Gary Gensler might actually do something to follow up on his own concerns about payment for order flow. So he introduced a doomed bill to specifically bar Gensler’s Securities and Exchange Commission from banning the practice, in which brokerages like Robinhood get paid handsomely to direct their customers’ trades to, say, Citadel Securities.
Turns out he should have taken Robinhood chief legal officer Dan Gallagher’s approach: Chill out, man. Just coast to retirement. Because once it gets a good look at PFOF, which just happens to be the “life blood” of his employer, the SEC is gonna realize that it’s “undoubtedly an amazing thing for retail investors and they’re not going to ban it.”
Gallagher was right. The SEC’s not going to ban PFOF. It’s just going to completely rejigger the way that the stock market works so as to make PFOF no longer possible.
One idea that has gained traction is to require brokerages to send most individual investors’ orders to be routed into auctions where trading firms compete to execute them…. Such a mechanism would fundamentally alter the business model of wholesalers, which can make more money by trading against small investors than they do on public exchanges, where they might find themselves trading with other sophisticated trading firms or institutional investors.
Oh, and that’s not all:
The agency is also considering creating a more-stringent version of the so-called best-execution rule that directs brokers to find the most favorable terms for their customers, two of the people said…. The SEC is also weighing a proposal to allow stock exchanges to quote shares in increments of less than 1 cent. This could enable venues such as Nasdaq or the New York Stock Exchange to better compete with wholesalers, which can beat the prices publicly displayed on exchanges by adding or subtracting hundredths of a penny to the price of a stock. Two people familiar with the matter said the agency is also considering an idea to harmonize the price increments, known as tick sizes, that are available on exchanges versus other venues.
In addition, SEC officials are aiming to reduce the maximum fee that exchanges can charge brokers to access their quotes, two of the people said. Like some of the other changes under consideration, such a move could encourage more orders to be sent to exchanges rather than to other venues.
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