CNBC | Bob Pisani | Mar 31, 2023

Image: Unsplash/Clay Banks

[Last Friday was] the final day for the trading industry and investors to submit comments on one of Securities and Exchange Commission Chair Gary Gensler’s most controversial proposals: a partial overhaul of the U.S. trading system.

• The package is so complex and potentially far-reaching that Gensler has broken them into four separate proposals.
  • Two of them have sizeable industry support and are likely to be adopted.
  • But two others are facing serious opposition and, at least one — the effort to replace payment for order flow by an auction process which came out of the GameStop meme stock controversy — may end in litigation to prevent it from seeing the light of day.

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• Gensler is critical of payment for order flow (PFOF), which allows some retail brokers to route orders to electronic market makers who pay the brokers for access to that order flow. Gensler claims that this practice prevents pension funds and institutional investors from interacting with retail order flow, and that brokers prioritize their financial gain over providing the best prices to their clients.
  • To increase competition, Gensler is proposing setting up auctions in which trading firms would compete to fill investors’ orders before they could be executed internally, which he claims could save investors about $1.5 billion annually.  “These everyday individual investors don’t have the full benefit of various market participants competing to execute their marketable orders at the best price possible”.

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• The auction proposal has generated a large volume of comment letters to the SEC.
  • Many submission letters have been submitted by individual retail investors who support the proposal.  A substantial number were motivated by events around Gamestop, AMC and other “meme stocks’ in early 2021, and many believe that payment for order flow was a part of that problem.
  • However, this proposal has drawn criticism from Wall Street.  Some are already threatening litigation if the proposal goes through.

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