The recent spike in retail trading may lead to a variety of regulatory reforms for the U.S. market, Moody’s Investors Service says.
In a new report, the rating agency said that a surge in market volatility driven by a jump in retail investor activity has raised the prospect of changes to U.S. market infrastructure, including the rules for retail brokers, central counterparty clearing houses (CCPs), market makers and exchanges.
While it’s not yet clear that policymakers will require reforms, Moody’s said that there could be a push for increased regulation of retail brokers to “ensure they have sufficient capital, liquidity and operational strength to satisfy clients’ market access needs.”
Regulators may also consider “strengthening retail brokers’ client margin rules and restricting retail clients’ ability to trade certain more complex options contracts that may have higher risk,” it said.
Another possible target of reform is the practice of paying for order flow.
Limits, or an outright ban, on paying for order flow would be a negative for the firms (brokers and market makers) that currently engage in these transactions, but would benefit traditional lit markets, Moody’s said.
The clearing and settlement cycle is another potential candidate for reform.
Measures to further reduce the cash equity clearing and settlement period would be positive for all market participants, Moody’s said, “since it would reduce clearing counterparty risk.”
Additionally, it suggested that reducing the latitude that CCPs have to set margin rules would benefit firms, but would be a considered a negative for affected CCPs.