Wall Street Stock Trading Rules Set For Overhaul: Sources

U.S. regulators are going to transform how Wall Street handles retail stock trades after the meme stock mania last year raised questions about whether mom-and-pop investors were getting the best price.

Gary Gensler, the chair of the U.S. Securities and Exchange Commission (SEC), will announce on Wednesday potential rule changes that would require trading firms to directly compete to execute trades from retail investors to boost competition, according to four industry sources.

He will also spell out how the agency plans to scrutinize the controversial payment for order flow (PFOF) practice, in which some brokers, like TD Ameritrade, Robinhood Markets and E*Trade, are paid by wholesale market makers for orders, said the people.

PFOF came under regulatory scrutiny last year when an army of retail investors went on a buying spree of "meme stocks" like GameStop and AMC, squeezing hedge funds that had shorted the shares. Many purchased the shares using commission-free brokers such as Robinhood.

An SEC spokesperson declined to comment.

The intended changes, the biggest shake-up of U.S. equity market rules in over a decade, would fundamentally alter the business model of wholesalers. They could also affect brokers' ability to offer commission-free trading to retail investors. Reuters first flagged the reforms in March.

Gensler's announcement will likely lead to formal proposals issued this fall, the sources said. The public can then weigh in on them ahead of an SEC vote to adopt them.

WHOLESALE OVERHAUL

The proposed rule changes will include an SEC definition of "best execution" requirements that would force retail brokers to send their customers' orders to auctions, run by exchanges or off-exchange trading venues, which would allow market participants to compete to trade against the orders, the sources said.

Currently, retail brokerages can send customer orders directly to a wholesale broker to be executed, as long as the broker is matching or bettering the best price available on U.S. exchanges. Large market-makers typically improve on the best price by a fraction of a cent. Gensler has criticized this model as limiting competition for retail orders.

The rules would require retail brokers to send PFOF customer orders to the wholesaler offering the best deal, rather than the one that pays the most.

The intended moves will fundamentally alter the business model of wholesalers, which can make more money by executing retail investor orders internally than they do on public exchanges, where they might find themselves trading with other sophisticated trading firms or institutional investors.

Gensler is also expected to detail more potential rule changes in his speech, including reducing trading size increments on exchanges to allow them to better compete with off-exchange trading venues, according to the sources.

Gensler told Reuters in March he wants to ensure 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.

"It's great to see the SEC taking a holistic approach to this problem - there's not a single answer, we need changes to different parts of the market," said Dave Lauer, CEO of financial platform Urvin Finance.

"We need an order-by-order standard for best execution and open competition for order flow in order to provide the best outcomes for retail investors. This will force greater competition, and could help to end the off-exchange oligopoly that has controlled that market for too long," he added.

Investor advocates want to boost exchanges' competitiveness to improve the reliability of the national pricing benchmark, known as the National Best Bid and Offer (NBBO).

They also wish to see the SEC boost disclosures from exchanges and market makers around pricing.