Gary Gensler, the Securities and Exchange Commission’s (SEC) chief securities regulator, has proposed rule revisions to revamp how Wall Street handles retail stock trading. The possible revamp comes amid rising public scrutiny of brokerage companies and market makers, as well as their interactions with regular investors.
The idea, which is in reaction to the retail stock frenzy of 2021, would compel trading companies to compete directly for retail investors’ transactions. Proponents say that the proposed changes will increase industry competitiveness and promote a more equitable trading environment for non-institutional individual investors. The regulation change would also require market makers to publish more information about the fees they collect and the timing of transactions for the benefit of investors. To increase competitiveness, auctions would become more open and transparent, and investors would get better, more accurate information, such as monthly price movement reports.
Similarly, the idea calls into question the practice of “payment for order flow,” or PFOF, in which market makers pay brokers to route orders. PFOF recently sparked controversy in early 2021, when amateur retail investors engaged on a purchasing frenzy of so-called meme stocks, driving up the price of equities such as GameStop (GME) and AMC (AMC), causing hedge funds who had previously shorted the shares to suffer losses. Typically, the shares were acquired using commission-free brokers such as Robinhood.
If approved, the rule revisions would be the most significant regulatory revamp of the financial services sector since the Dodd-Frank Act was passed over a decade ago. Formal proposals are likely this autumn, and adoption of the proposed modifications would need an SEC vote of approval.
Many industry practitioners and experts have expressed support for the initiative, which has the potential to increase openness and investor confidence. Others, like Robinhood’s Chief Legal Officer Dan Gallagher, were doubtful. In defending Robinhood’s present model of commission-free trading, which has considerably increased retail investor involvement in the market, Gallagher said that a more extensive economic study was required to support the regulation changes.
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