Gensler’s SEC Is Learning to Pick Its BattlesUpending the stock market for uncertain rewards shouldn’t be a priority.
The EditorsSeptember 26, 2022, 8:00 AM EDT
Good move.
Photographer: Kevin Dietsch/Getty ImagesFrom regulating crypto to improving corporate disclosure on climate risks, Securities and Exchange Commission Chair Gary Gensler has taken on many daunting challenges that, if things go well, could vastly improve prospects for investors, the economy and the planet.
It’s thus good to see him stepping back from a much less obviously useful quest: upending the stock market for uncertain rewards.
Bloomberg opinion
At issue is the way stock trading works. Right now, the system is quite favorable for the millions of retail investors who trade on their own accounts. Retail brokerages (such as Robinhood Markets Inc.) typically route their orders to wholesale brokers (such as Citadel Securities LLC and Virtu Financial Inc.), which like to take retail investors’ trades because they’re more random — and hence less likely to lead to losses — than those of well-informed investors such as hedge funds. To attract this desirable business, the wholesalers typically offer better prices than what’s available on “lit” public markets. They also send money back to retail brokers, a practice known as “payment for order flow” that has enabled the era of commission-free trading.
Yet useful as it may be for some, this setup — with payments that look like kickbacks and retail orders filled in the dark — has attracted the suspicion of lawmakers, who have put pressure on regulators to do something. To that end, Gensler suggested earlier this year that the SEC might consider banning payment for order flow, and getting everyone to trade with everyone in a more “open and transparent” way.
In theory, such reforms might have advantages. If more retail orders reached public exchanges, they might slightly (on the order of hundredths of a percentage point) improve pricing for pension, mutual and index funds. If retail brokers had to reintroduce commissions, active traders (who on average don’t profit from their efforts) might think twice before piling into (say) meme stocks at absurd valuations.
That said, the costs — both financial and political — could easily outweigh the benefits. Among other things, the clamorous ranks of retail traders certainly wouldn’t be happy about losing their advantages, in terms of both commissions and price. And there would be downsides to any shift of trading to public exchanges, which have their own system of kickbacks and fees. The potential for unintended consequences would be significant.
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More to the point, the SEC has better things to do than attempting to restructure the stock market for minimal gain. So it’s good news that, as Bloomberg News reports, the agency has dropped the idea of banning payment for order flow. Let’s hope it’s also letting go of other fraught ideas that might still be on the table, such as forcing trades onto exchanges with order-by-order auctions (which hasn’t worked particularly well in the options market).
For now, the SEC’s limited attention and resources can be better deployed elsewhere. |
