SEC Chairman Proposes Review of Rules Underpinning Stock Trading

Wall Street’s top regulator is calling for a broad review of rules that underpin U.S. equity trading, the latest evidence that the meme-stock mayhem is likely to trigger an overhaul.

U.S. Securities and Exchange Commission Chair Gary Gensler said Wednesday that he’s asked the agency’s staff to examine best execution requirements -- legal mandates that ostensibly force brokers to process customers’ orders at advantageous prices. Gensler added that the process for settling transactions could be shortened to the same day. He also reiterated concerns that companies behind popular smartphone apps have profit incentives to hook consumers on trading.

Trading rules have come under scrutiny amid wild swings for GameStop Corp., AMC Entertainment Holdings Inc. and other companies. While Gensler didn’t mention them by name, he directed some of his most pointed comments to market makers like Citadel Securities LLC and Virtu Financial Inc. Those firms pay retail brokers a fee to execute clients’ trade orders.

“Brokers profit when investors trade,” Gensler said in a speech at the Piper Sandler Global Exchange & FinTech Conference. “For those brokers who have these arrangements -- and not all do -- higher trading volume generates more payment for order flow. What makes the current zero-commission brokerage environment different is that investors do not see their costs as they’re executing trades, so they may perceive them as free.”

Virtu slid 7.7% in New York trading, its biggest one-day slump since September. Interactive Brokers Group Inc. and Charles Schwab Corp. also declined.

Gensler, who took over the agency in April, has said previously that there are inherent conflicts tied to payment for order flow and that the SEC was looking closely at whether it needs to revamp regulations.

On Wednesday, Gensler said that he’d directed the SEC staff to focus on whether retail investors are indeed getting the best deal for their trades. He raised issues around best-execution requirements that brokers must comply with when handling trades.