The top Wall Street police said Tuesday that Citadel Securities’ dominance in the routing order flow business may not give retail investors the best deal.
U.S. Securities and Exchange Commission Chairman Gary Gensler told the Senate Banking Committee he was concerned about Citadel Securities ’47% market share of all U.S.-listed retail volume. Virtu Financial (VIRT), another wholesaler, controls between 25% and 30%.
“I’m in favor of competition and I’m not sure paying for the order flow system is really the best competitive landscape,” Gensler said.
Gensler did not mention the name Citadel Securities, but did footnote the prepared statements by the SEC president.
The SEC has not ruled out the possibility of a total ban on the payment of order flow, the practice of a brokerage (such as Robinhood) that transmits stock orders to a wholesaler (such as Citadel Securities) to actually locate and execute.
When these wholesalers find a stock at a cheaper price than the investor asked for, the savings are shared by the wholesaler and the broker, who can pass on the cost savings to the investor in the form of a better price. Payment for the order flow model is one of the main reasons why brokers like Robinhood (HOOD) can offer commission-free transactions.
Wholesalers also receive discounts on stock exchanges such as the New York Stock Exchange to provide liquidity, consolidating their role as intermediaries in stock exchange operations.
“I think the payment conflicts inherent in order flow and stock market bonuses can make our markets less efficient,” Gensler said.
Yahoo Finance reported that Gensler raised the issue of concentrating retail order flow at the first White House Competition Council meeting last Friday, President Joe Biden’s initiative to push federal agencies to curb behaviors anticompetitive.
“Everyone on the table”
Questions remain about how the SEC will proceed in any reform.
The former Goldman Sachs banker alluded not only to the possibility of banning the payment of order flow, but also to rethinking sales and the way in which prices are referred to according to the parameters set by National Best Bid and Offer (NBBO).
“In this area, everything is on the table,” Gensler said, adding that the SEC’s sole goal is to foster competition “to reduce cost and increase efficiency” of the rent market structure. variable.
Once he was an arcane mechanic in the brokerage industry, payment order flow gained national attention during the early 2021 frenzy over meme stocks like GameStop (GME).
Robinhood, which went public in late July, has relied heavily on payment for the order flow and has seen its revenue from practice nearly triple in 2020.
Many brokers followed Robinhood by betting more on payment for the order flow as they eliminated commissions, although Fidelity has remained resilient to the model.
After being removed to Capitol Hill to testify after the pre-GameStop period froze some trading activity, Ken Griffin of Citadel Securities said paying the order flow has been helpful to the brokerage industry and the investor. retailer in general.
“This has been very important to the democratization of finance, it has allowed U.S. retail investors to have the lowest running cost they have ever had in the history of the U.S. financial market,” Griffin said.
Gensler said Tuesday that the SEC is close to releasing its report on the meme stock episode, noting that other SEC commissioners are currently reviewing it.
Brian Cheung is a journalist covering the Fed, economics and banking at Yahoo Finance. You can follow him on Twitter @bcheungz.
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