Wall Street threatens to take legal action against the SEC to halt the implementation of new proposals aimed at revolutionizing stock trading.
Apr 2, 2023
SEC Chairman Gary Gensler has expressed his opposition to payment for order flow (PFOF), which allows some retail orders to be directed to wholesalers like Citadel and Virtu who pay brokers for access to that order flow. This practice is controversial because it raises concerns about potential conflicts of interest, with critics arguing that it could encourage brokers to prioritize their own financial interests over those of their clients, ultimately leading to inferior execution quality and negative investor outcomes.
Meanwhile, supporters of PFOF argue that it promotes market efficiency by facilitating quick and fair execution of trades while also enabling brokers to provide commission-free trading to their customers.
These wholesalers may send orders to exchanges, where they can profit from price spreads or price movements through derivatives trading, leading to significant conflicts of interest. Recently, the NYSE, retail broker Charles Schwab, and market maker Citadel Securities teamed up to ask the SEC to withdraw two newly proposed rules aimed at overhauling how stocks are traded. This move is a coordinated pushback against the SEC’s most comprehensive effort to reform stock market rules in almost two decades.
SEC Faces Potential Lawsuits from Wall Street
The SEC recently decided to delay a rule that would have increased regulators’ visibility into financial risks at some hedge funds and private equity funds. Wall Street institutions are threatening legal action if the proposals are approved, citing the Administrative Procedures Act (APA), which governs how government agencies can establish regulations. Failure to comply with the APA may result in legal action against the SEC. Virtu CEO Doug Cifu has already stated that the proposals could lead to litigation.
Gensler’s proposal for a new rule called Regulation Best Execution seeks to establish a national best execution standard that ensures broker-dealers direct orders to the venue that provides the best price for both buyers and sellers. However, FINRA is currently responsible for enforcing the best execution rule, which Gensler believes should be the responsibility of the SEC. FINRA is under scrutiny for several scandals, the latest of which involves the U3 halt and delisting of M M M T L P stock.
Retail investors have criticized the SEC for failing to protect small investors from predatory market practices and for allegedly bowing down to Wall Street. Many in the retail community believe that SEC commissioners should be elected rather than appointed by the US President.
More than 1,300 pieces of correspondence have been submitted to the Securities and Exchange Commission (SEC) advocating for regulations proposed in December, which embody the most significant changes to stock trading in almost two decades.
A coalition of individual investors has joined forces under the banner of ‘We The Investors,’ spearheaded by Dave Lauer, in an effort to challenge Wall Street as a legitimate entity that stemmed from the events of the ‘meme stock’ frenzy in 2021. Since December, We The Investors have held two virtual meetings with the SEC Chair Gary Gensler, who directly engaged with retail investors regarding the proposals. These proposals include the demand for most retail stock orders to be directed to auctions to improve competition. Other proposed regulations entail a novel criterion for brokers to establish that they have executed the best deals for clients on transactions. Additionally, there are intentions to decrease trading increments and access fees on exchanges while enforcing more robust disclosure policies surrounding retail order executions.