Stock Market Reform – SEC Change the Rules
Ever since the GameStop fiasco in early 2021, the SEC has explored ways to fix the inner workings of the stock market. At that time, President Biden’s appointee Gary Gensler took office as the chair of the SEC, and to the demise of many his main focus is on patching the holes of the financial market. The biggest one is the issue of payment for order flow, where brokerage firms sell their orders to high-speed trading firms who profit off the small difference between the buying and selling price. With this system, the clients of a brokerage aren’t being prioritized as there’s a clear conflict of interest. Clients don’t get the best deal possible as brokerages look for who is paying the most instead of who can execute the order quicker, which is against what brokerage firms are obligated to do.
Gensler, along with many people on Wall Street, have heavily criticized this system and were looking to remove it altogether, but lobbying efforts from firms like Citadel have barred this from occurring. Instead, Gensler looks to increase the transparency of stock trade execution in multiple ways. One idea is an order competition rule, where trades would have to be exposed in open competition, before heading to the current brokerage systems where order competition isn’t present. The other common idea has been the “best execution” model, which would change the system completely by requiring brokerage firms to send customer orders to the place that gives the best available price, thus giving more power to the trader. These provisions are set to be presented at the SEC meeting next Wednesday, and if a majority of the panel supports it the SEC would discuss finalizing the rules and putting them into effect.
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I am not a financial advisor and my comments should never be taken as financial advice. Investments come with risk, so always do your research and analysis beforehand.