The U.S. Securities and Exchange Commission is embarking on its most ambitious program of market-structure reform in a generation in the wake of the meme-stock saga that focused the public’s attention on stock-market plumbing like never before.
The financial rule making process is typically dominated by insiders with the knowledge and resources to keep up the pressure on regulators, but this time around individual investors are using the power of social media to organize and make their voices heard.
See also: Gensler’s meme-stock reforms are meant to help retail traders. Some investor protection advocates aren’t so sure.
Their newfound might can be seen in the more than 2,600 comment letters submitted to the SEC by We The Investors (WTI), a retail advocacy group founded by finance-industry veteran David Lauer, over Chairman Gary Gensler’s proposed overhaul of the system for routing stock-market orders submitted by individual investors.
That figure composes more than half of the comments received on the SEC’s proposed “Order Competition Rule,” according to a MarketWatch tally.
The group comprises “people from all walks of life,” Lauer told MarketWatch in an interview, adding that “the one thing they have in common is that they have shares in U.S. companies, they’ve learned how markets work and they see that there’s too many conflicts of interest, too much rent seeking and not enough transparency,” in how their trades are executed.
In the popular imagination, stocks are traded on the floors of famous exchanges like the New York Stock Exchange or Nasdaq
NDAQ,
but in reality 90% of market orders placed by average investors are actually executed by a group of six market makers who match buyers and sellers away from public exchanges — with just two firms, Citadel Securities and Virtu Financial
VIRT,
capturing 60% of retail wholesale market share, according to the Committee on Capital Markets Regulation.
Lauer says this trend of wholesalers grabbing market share from traditional exchanges has helped create a fragmented marketplace that is less liquid and leads to investors getting worse prices for stocks than they would in a system where most trading occurs on exchanges with publicly visible trading activity.
Stephen John Berger, head of government and regulatory policy at Citadel Securities disagrees with this analysis, writing in a comment letter to the SEC last week that the “U.S. equity markets are the fairest, most transparent, resilient and competitive markets in the world.”
He pointed to statistics showing that transaction costs over the past two decades have come down, while retail traders today enjoy widespread commission-free trading.
The more than 100,000 retail traders subscribed to Lauer’s mailing list believe that despite the prevalence of no-commission trading the system could be fairer, and they have the ear of Chairman Gensler, who met with Lauer last year to hear his case for reform.
That meeting was followed by another with Gensler’s staff as they were crafting the rule proposals that were put forward by the commission in December. A few days after the SEC put forward its proposals, Gensler took part in a Twitter Spaces forum with Lauer and fellow WTI members.
Lauer is encouraged by this engagement and believes it shows that individual investors “have a seat at the table” in a way they hadn’t in previous reform eras.
Federal law requires regulators like the SEC to take input from the public after a rule proposal, and the comment period for this slate of rule making ended last week. The SEC must consider every comment it receives, and promulgating a final set of rules will take time.
Lauer says his group will keep up the pressure, telling MarketWatch that the group has “big plans to keep this issue in the public eye,” because “this is something that every American should care about.”
Lauer is confident the SEC will move relatively quickly to implement a final set of rules.
“This is something the agency has been thinking about for a very long time, and they’ve done their homework,” he said. “They’re going to be pretty aggressive and I’d imagine this time next year, we’ll have new rules in place.”
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