The U.S. Securities and Exchange Commission is preparing to propose major changes to the stock market’s plumbing as soon as this fall.
Chairman Gary Gensler directed SEC staff last year to explore ways to make the stock market more efficient for small investors and public companies. While aspects of the effort are in varying stages of development, one idea that has gained traction is to require brokerages to send most individual investors’ orders to be routed into auctions where trading firms compete to execute them, people familiar with the matter said.
SEC staffers have begun floating plans with market participants in recent weeks, and Mr. Gensler is planning to detail some of the potential changes in a speech Wednesday, these people added.
The most consequential change being discussed would affect the way trades are handled after an investor places a so-called market order with a broker to buy or sell a stock. Market orders, which account for the majority of individual investors’ trades, don’t specify a minimum or maximum price the investor is willing to pay.
Mr. Gensler has said he wants to ensure that brokers execute orders at the best possible price for investors—the highest price for when an investor is selling, or the lowest price if they are buying.
Current rules require brokers to perform “reasonable diligence” to determine the likely best market for executing a trade. Many brokers route orders to big electronic trading firms called wholesalers, including Citadel Securities or Virtu Financial Inc
VIRT,
rather than to exchanges such as the Nasdaq Stock Market
NDAQ,
arguing that the wholesalers provide the best prices.
Some brokers, including Charles Schwab Corp
SCHW,
and Robinhood Markets Inc
HOOD,
accept compensation from wholesalers for routing trades to their venues. Mr. Gensler has said this practice, known as payment for order flow, creates a conflict of interest and limits competition for individual orders.
Under the auctions being considered by the SEC, different firms would compete with each other to fill an individual investor’s trade, according to people familiar with the agency’s plans. Such a mechanism would fundamentally alter the business model of wholesalers, which can make more money by trading against small investors than they do on public exchanges, where they might find themselves trading with other sophisticated trading firms or institutional investors.
An SEC spokesman declined to comment.
A number of Wall Street firms pushed back forcefully last year when it became apparent that Mr. Gensler was targeting their business models. Wholesalers and brokers ramped up their lobbying and campaign spending in Washington and published their own plans for improving the stock market.
