SEC Chairman Gary Gensler made headlines today while speaking at the Piper Sandler Global Exchange Conference.
The chairman has made it clear in the past that increasing market competition and leveling the playing field for retail is a key part of his agenda. Today he noted that he’s “…asked agency staff to consider requiring brokerages to route individual investors’ orders to buy or sell stocks into auctions.”
The change would be a significant shakeup of market structure and virtually eliminate the “payment for order flow (PFOF)” that many brokerages like Robinhood and Charles Schwab rely on for a large share of their revenues.
Payment for order flow refers to the rebates/payments brokerages receive from wholesale market makers like Citadel Securities and Virtu Financial when they route trades to them instead of directly to exchanges.
Firms like Citadel and Virtu argue they provide market liquidity and better pricing than routing directly to the exchange. Still, skeptics say this payment arrangement creates a conflict of interest in brokers’ best execution obligations.
If you’re making most of your money by routing orders to a wholesale firm, will you be adequately incentivized to send orders to other venues that may give your clients better order fills?
That’s the big question. And given the SEC and Gary Gensler’s actions, it appears they think the answer is no and that significant changes are needed.
$HOOD shares fell 3.90%, given that roughly 75% of their revenues come from PFOF.
Charles Schwab, which makes about 20% of its revenues from PFOF, saw its shares fall 2.61%.