US SEC Chairman Gary Gensler on trading
(U.S. SEC Chairman Gary Gensler)

Wall Street’s top regulator is looking to change the rules around equity trading

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The U.S. Securities and Exchange Commission (SEC), the top US stock market regulator,
is reviewing possible changes to some of the stock market’s most fundamental rules according to remarks made by Chairman Gary Gensler on Wednesday (June 9) at an industry conference in New York.

“I’ve asked staff to make recommendations for the Commission’s consideration on best execution, Regulation NMS, payment-for-order flow, minimum pricing increments, and the National Best Bid and Offer, with the aim of continuing to make our markets as efficient as possible,” Gensler, who took over the SEC in April, said.

The National Best Bid and Offer (NBBO) is used to determine whether brokers are meeting their best execution requirements. Regulation NMS requires trading centers to establish, maintain, and enforce written policies and procedures that are reasonably designed to prevent the execution of trades at prices that are inferior to protected quotations displayed by other trading centers.

Earlier this week, it was reported that Gensler’s concern over the meme-stock mayhem
might lead to new rules for trading apps which have profit incentives to hook consumers on trading.

“The question is whether our equity markets are as efficient as they could be, in light of the technological changes and recent developments,” Gensler told the Piper Sandler Global Exchange & FinTech Conference.

In his speech, the SEC chair also noted that “gamification” features common in apps also encourage investors to trade more.

Trading rules have come under scrutiny amid the surge in trading over the past year by individual investors in “meme stocks.” A meme stock is a stock that has gone viral online, drawing the attention of retail investors.

In January, day traders swapping ideas on online forum Reddit and using the trading app Robinhood drove shares in American brick-and-mortar retailer GameStop and other companies dramatically higher.

“Brokers profit when investors trade,” Gensler also said. “For those brokers who have these arrangements — and not all do — higher trading volume generates more payment for order flow. What makes the current zero-commission brokerage environment different is that investors do not see their costs as they’re executing trades, so they may perceive them as free.”

Any SEC rule changes would first be issued as proposals, making it possible for investors and other market participants to comment on them, according to the Wall Steet Journal. Gensler did not say when the SEC would issue a proposal, but said, “It should not be confused with something that is far off.”

After Gensler’s remarks shares in the trading company Virtu Financial plunged 7.7% Virtu handles between 25% and 30% of individual investors’ order flow in U.S. Stocks. The New York-based company’s stock has rallied this year during the meme-stock frenzy.

Trading platform  Robinhood, which is readying an initial public offering, and critics have most closely associated gamification with the California-based firm, said in a statement that it “looks forward to engaging with the SEC through its formal rulemaking process as it considers changes to the current market structure, which is working so well for an increasingly diverse universe of investors”.