The Securities and Exchange Commission is considering changing rules governing how U.S. stocks are traded, including price incentives that stock exchanges and brokers use to attract orders, chairman Gary Gensler said Wednesday.
In an industry conference, Mr. Gensler a broader study of the market structure than he has previously described. Mr. Gensler, who took over the SEC in April, has previously questioned the system, which results in many individual investors’ orders being sent to large brokerage firms known as wholesalers, such as Citadel Securities and Virtu Financial Inc., instead of going to public exchanges. .
Mr. Gensler suggested that individual investors could get better prices if more trading was done on public exchanges. Only about 53% of all trading in January took place on stock exchanges, while the rest involved wholesalers and broker-operated trading venues known as dark pools, Gensler said.
“The question is whether our stock markets are as efficient as they could be in the light of technological change and recent developments,”
While public exchanges reveal their bids and offers and then compile orders to publish a national best bid and offer for each stock, wholesalers and so-called dark pools do not reveal their pre-trade prices. These trading venues need to execute trades at at least as good prices as the national best price coming from the stock exchanges.
But the national best bid and offer, known as the NBBO, could be an understandard benchmark, Mr. Gensler because so many trades happen away from the stock exchanges. Even some exchange orders are not included in the national best price, such as those in odd party sizes where fewer than 100 shares change hands.
“I think there are signs … that NBBO is not a complete representation of the market,” said Mr. Gensler.
The SEC will consider revising how the benchmark is calculated, Gensler said. The agency will investigate other potential rule changes related to how stock exchanges and brokers price stocks, he said.
Mr. Gensler has previously criticized a system of trade incentives known as payment for order flow, where retail brokers send customers’ orders to wholesalers for a fee. The wholesaler executes the order, typically at a price slightly better than the national best bid or offer.
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