The SEC Takes on Retail Traders

Gary Gensler in 2012.


jonathan ernst/Reuters

If you’re one of millions of Americans trading stocks with zero commission, you have

Gary Gensler’s

sympathy. The new chairman of the Securities and Exchange Commission wants to restrict the business model that has made trading cheaper and more accessible than ever.

Mr. Gensler last week told a conference of Wall Street executives that he’ll set new rules on payment for order flow. This revenue model allows brokers like Robinhood, Fidelity and Charles Schwab to fill trade orders without charging fees to users.

Robinhood has increased its user base by more than five million in the past year, and Mr. Gensler wants to pump the brakes. “What makes the current zero-commission brokerage environment different,” he says, “is that investors do not see their costs as they’re executing trades.” That echoes his remarks to the House Financial Services Committee last month, and he’s ordered his agency to propose new restrictions.

Those costs show up in a small number of trades. Market makers like Citadel and Virtu pay brokers to execute their customers’ orders, and they can profit by selling shares to the buyers at a slightly higher price than they got on the market.

Yet the SEC’s push to regulate payment for order flows looks like a solution in search of a problem. Retail investors get a better price than they would find on the New York Stock Exchange or Nasdaq on more than 90% of zero-commission trades, as market makers’ data systems allow speedier trading. Audit firm

IHS Markit

estimated that Fidelity last year saved customers an average of $2.88 on trades of 100 shares.

In December 2020 Robinhood settled a lawsuit from the SEC, which alleged that suboptimal trades cost users $34 million from 2016-2019. The platform has since begun releasing data on price improvement, and in the first quarter data analyst S3 found that users saved $1.12 on average for each trade of 100 shares.

Compare these savings with the costs that preceded the rush to zero commission. Schwab in October 2019 accelerated the trend by cutting its fee on each trade to zero from $4.95. The largest platform, TD Ameritrade, eliminated its $6.95 fee before merging with Schwab. Both have since drawn a surge in customers, and daily stock trading volume has ballooned.

In announcing the SEC review, Mr. Gensler told trading firms “the question is whether our equity markets are as efficient as they could be in light of the technological changes.” There are no doubt ways the SEC could ease regulations to make the plumbing of stock trading more efficient. But the SEC should avoid messing up a market model that’s working.

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