Amid a surge in retail trading, the U.S. Securities and Exchange Commission (SEC) will be considering possible market structure reforms, says SEC chair Gary Gensler.
Speaking at an industry conference, Gensler said the prevailing rules governing market structure don’t fully reflect how markets operate today, given that technology has dramatically altered how trading platforms compete and investors access markets, as well as the economic incentives of various market players.
“Retail investors can trade over commission-free brokerage apps. That wasn’t the case even a few years ago,” he noted.
Moreover, he reported that a large portion of trading volume is now being executed off-exchange.
In January about 53% of volume was executed on transparent markets, another 9% of trading took place in dark pools and 38% was carried out by wholesalers completing trades internally.
Within that off-exchange trading activity, there’s also increasing concentration, Gensler said.
“Market concentration can deter healthy competition and limit innovation. It also can increase potential system-wide risks, should any single incumbent with significant size or market share fail,” he noted.
Additionally, the current trading landscape raises investor protection questions, due to the prevalence of “payment for order flow” and trading rebates, which can distort markets, create conflicts of interest, and may confer unfair advantages on firms with better market data.
Given all of these changes, Gensler said it’s appropriate for regulators to reconsider how its rules are operating to ensure fair and efficient markets, investor protection and capital formation.
Specifically, he said he’s directed SEC staff to make policy recommendations on a range of market structure issues, such as best execution rules, payment for order flow and minimum pricing increments, “with the aim of continuing to make our markets as efficient as possible.”
He also said he asked the regulator’s staff to seek public input on issues involving the “gamification” of retail trading and whether there are gaps in the rules for central clearing that need to be addressed.