SEC Weighs Changes to Stock-Trading Rules

    Photo: Pool/Reuters [via CNBC]

    The Facts

    • Gary Gensler, chair of the Securities and Exchange Commission (SEC), unveiled plans on Wed. to overhaul the rules regulating how Wall Street brokers handle retail stock trades.

    • The proposed reforms specifically focus on the practice known as "payment for order flow" (PFOF), whereby brokers representing retail investors receive rebates for sending trades to certain wholesaler market-makers.

    The Spin

    Narrative A

    The PFOF model has unlocked incredible value and efficiency for American retail investors, who have saved billions of dollars in commissions and fees. The interests of retail investors are protected by the Financial Industry Regulatory Authority (FINRA), which requires brokers to obtain the best possible price on behalf of their customers.

    Narrative B

    More competition leads to more efficient markets - full stop. Gensler's proposal would establish an SEC-defined "best execution" standard that requires brokers to sell their order flow through open and transparent auctions. Unlike PFOF, the new system will ensure that retail investors are being treated fairly and ethically by their brokers.

    Cynical narrative

    "Meme stock" investors maintain that the PFOF relationship was what ultimately lead to the shutdown of the "meme stock" short squeeze. Brokers like Robinhood shut down trading in stocks like GameStop in order to stave off losses to their wholesale partners. No evidence has been presented to confirm this theory, but it was certainly all very convenient for the big players and costly for the little guys.

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