Explainer: What does SEC’s overhaul of US stock markets entail

The proposals include lower trading increments and access fees on exchanges, a new standard for brokers to demonstrate they get the best possible executions for client orders, and a requirement that marketable retail stock orders be sent to auctions before they are executed.

The regulator also voted to increase disclosures regarding insider trading in company shares by individuals who have received equity-based compensation, such as executives and directors.

If implemented, the changes would be the most significant revision to stock market regulations since the SEC’s introduction of Regulation National Market System in 2005, which was intended to modernise and improve an increasingly dispersed and largely electronic market.

The proposed changes are now open for public comment. The SEC will take inputs for 60 days.

Joe Saluzzi, co-manager of trading at Themis Trading said that, “We feel that these reforms, if enacted, will ultimately help the price discovery process and save investor’s money. Allowing orders to interact with each other, rather than segmenting them, will enhance competition and yield better prices.”

Among many others, the proposals include 2 significant reforms for the overhaul of US markets-

– Sending marketable retail stock orders to auctions before they are executed

– A new standard for brokers to show they get the best possible executions for client orders

Auctioning marketable retail stock orders

New auction mechanism would force brokers to offer retail investor orders to a wider group of trading venues if they are less than $200,000.

The SEC said, “Opening up individual investor orders that can be immediately executed to competitive auctions could lead to “significantly” better prices for investors,” reported Reuters.

Under current practice, retail brokers send most such orders to wholesale brokers, sometimes for a fee.

The order competition rule, which would require marketable retail orders to be sent to auctions, may result in more of these orders being filled on exchanges like the Nasdaq or the New York Stock Exchange of Intercontinental Exchange Inc. rather than by wholesale brokers.

Wholesalers, or “off-exchange” dealers such as Citadel Securities and Virtu Financial, benefit from lower costs on these transactions than are available on the New York Stock Exchange and other exchanges.

“The competitive shortfall could be worth about $1.5 billion annually, compared with current practice — money that could go back into retail investors’ pockets,” said SEC Chair Gary Gensler.

Firms that benefit from the status quo, such as wholesalers and retail brokers that receive payments from them, will likely fight the SEC’s proposals, said Stephen Hall, Better Markets’ Legal Director and Securities Specialist.

Citadel Securities said in a statement that “any proposed changes must provide demonstrable solutions to real problems while avoiding unintended consequences that will hurt American investors.”

New standards for brokers

Additionally, the SEC voted to expand the number of companies that must file order execution reports while also recommending that brokers be required to provide more details on the quality of the customer trades.

The proposal would require brokers to document exactly how they had looked at venues to ensure they got the best price for their customers. Currently, the definition of best execution is set by the Financial Industry Regulatory Authority, not the SEC.

“I believe a best execution standard is too important, too central to the SEC’s mandate to protect investors, not to have on the books as commission rule text,” said Gensler as quoted by Financial Times.

About Securities and Exchange Commission

Securities and Exchange Commission (SEC), is a regulatory commission established by US Congress in 1934 after the Senate Committee on Banking and Currency investigated the New York Stock Exchange’s operations.

The commission’s goal is to restore investor confidence by putting an end to the deceptive sales tactics and stock manipulations that caused the stock market crash in 1929.

(With inputs from Reuters)