Wall Street's Top Cop Wants Stock Market Overhauled

The agency in charge of Wall Street has proposed significant changes to benefit millions of ordinary investors buying and selling stocks.

Photo Insert: Trading could be made more equitable for everyday retail investors by making changes to the stock market's plumbing, Securities and Exchange Commission Chair Gary Gensler.

That could spell disaster for so-called free-trading apps like Robinhood, as well as the lesser-known companies that underpin their business models, Allison Morrow and Matt Egan reported for CNN Business.

Trading could be made more equitable for everyday retail investors by making changes to the stock market's plumbing, Securities and Exchange Commission Chair Gary Gensler said Wednesday at the Piper Sandler Global Exchange Conference in Washington.

Gensler asked the SEC to consider granting retail traders access to some of the perks previously reserved for Wall Street's biggest players, such as the ability to buy stocks for fractions of a penny, gain better visibility into market mechanics, and invite more buyers and sellers to ensure everyday investors get the best price on a purchase or sale.

Among Gensler's most significant proposed changes is a stock market anomaly that was revealed during the meme stock mania a year ago. When you buy or sell a stock on an app today, the transaction appears to be instantaneous. But beneath that simple buy/sell action is a complex web of Wall Street players profiting from minute price differences.

Here's how it works: When you tap buy or sell, Robinhood (or your preferred broker) sends your order to a wholesaler or market maker — the middlemen who are supposed to get you the best price and who pay the brokers for the privilege of executing the trades. Each transaction usually nets them pennies.

This is known as "payment for order flow," and it has come under close scrutiny by regulators in the aftermath of the January 2021 run-up in meme stocks such as GameStop.

The GameStop frenzy "exposed how rigged the US equity markets are to enrich big Wall Street firms, high-frequency trading firms, and brokers at the expense of Main Street retail investors," Better Markets CEO Dennis Kelleher wrote at the time.

The Securities and Exchange Commission has been investigating the system, which accounts for the majority of brokerage revenues. In August of last year, Robinhood's stock plummeted after Gensler stated that an outright ban on payment for order flow was "on the table."

Gensler and other critics of the process claim that brokers and market makers, such as Citadel Securities, have a clear conflict of interest, and that payment for order flow exploits ordinary investors while enriching Wall Street firms.

The SEC is considering increasing competition at the middleman level to ensure that retail investors are getting the best prices. Orders would be routed into auctions where trading firms would compete to execute them in that scenario.

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