Factbox-The SEC’s response to the ‘meme stock’ rally
(Reuters) – A year-and-a-half after a “meme inventory” rally roiled Wall Road, the U.S. Securities and Alternate Fee is contemplating broad modifications to curb the frenetic buying and selling of shares primarily based on social media exercise.
The proposed overhaul could be the most important change to Wall Road’s guidelines since 2005 and would have an effect on almost each nook of the market, from commission-free brokerages to market makers and exchanges.
The U.S. Home Committee on Monetary Companies on Friday known as for the SEC, together with different regulators, to do extra to guard the markets from comparable occasions.
The impetus for change got here from the so-called “Reddit rally” of January 2021, wherein GameStop Corp and different “meme shares” fashionable on social media surged to excessive highs on shopping for from traders buying and selling closely via Robinhood and different commission-free retail brokerages.
The extraordinary volatility led to massive losses for hedge funds that had wager towards the meme shares.
It additionally led Robinhood and others to limit buying and selling within the affected securities, in flip curbing the rally, infuriating retail traders and rattling market confidence.
Listed here are among the points the SEC is scrutinizing:
PAYMENT FOR ORDER FLOW
Gary Gensler, the SEC chief, has criticized cost for order circulate (PFOF), a observe wherein some commission-free brokers generate income by sending buyer orders to wholesale market makers in return for funds, somewhat than to exchanges.
He has stated a ban on the observe isn’t off the desk because it raises potential conflicts of curiosity, giving brokers incentives to encourage prospects to commerce extra often to maximise the funds.
The meme inventory buying and selling frenzy uncovered issues in regards to the methods wherein PFOF will increase complexity and potential fragility within the securities markets, the Home Monetary Companies Committee report stated.
Proponents say PFOF is a significant purpose brokerages have been capable of cease charging buying and selling commissions, and retail traders typically get a decrease, higher value than they’d on the primary trade.
DIGITAL TRADING PROMPTS
Gensler has criticized the “gamification of buying and selling” wherein commission-free brokerages encourage extreme buying and selling utilizing lights, noises, notifications and different gimmicks to generate extra PFOF.
He has additionally highlighted the usage of synthetic intelligence, predictive information analytics and machine studying to push merchandise.
In August https://www.reuters.com/authorized/transactional/us-markets-regulator-wants-public-feedback-firms-digital-engagement-practices-2021-08-27 2021, the SEC issued a session on potential new guidelines to restrict gamification and different “digital engagement prompts.” The company is anticipated to proceed with a rule change https://www.reuters.com/enterprise/finance/will-games-stop-sec-mulls-crackdown-trading-apps-2022-01-26 within the coming months.
The U.S. Home Monetary Companies Committee on Friday urged Congress to undertake laws mandating the SEC examine how its guidelines want to vary to handle new technological developments, akin to digital engagement practices and social media-driven market exercise.
CONCENTRATION, PRICING
The GameStop saga highlighted the small variety of market-makers — brokers that execute trades and publicly put up purchase and promote quotes for others to commerce — that dominate the retail market, which can pose competitors points, Gensler has stated.
The Home Monetary Companies Committee stated that on the time of the Reddit rally, Robinhood was not linked to any exchanges, and of the six market makers Robinhood routed all its prospects’ orders to, almost all have been unable to execute trades in sure meme shares as a result of market stress.
“Had all these market makers been unable to execute trades, Robinhood would have been unable to execute trades on behalf of its prospects,” the report stated.
Practically all retail trades are executed away from exchanges.
That’s partly resulting from guidelines that enable market makers to supply fractional sub-penny value enchancment on bids and presents, whereas exchanges must quote in pennies.
Gensler has stated that has created an uneven taking part in subject within the competitors for retail orders.
Gensler has requested SEC workers to suggest potential modifications to harmonize the power to show sub-penny quotes on and off trade.
(Reporting by John McCrank in New York and Katanga Johnson in Washington, Enhancing by Deepa Babington)
