[Asia Economy Reporter Jeong Hyunjin] The U.S. Securities and Exchange Commission (SEC) has put the brakes on the order processing methods of retail stock trading platforms such as Robinhood, which created a frenzy among U.S. retail investors during the COVID-19 pandemic. The SEC proposed changing the regulations from the current method of aggregating investors' orders and processing them at trading firms to a system where individual orders are immediately sent to the market for competitive bidding, arguing that the current method harms individual investors' interests.
According to the Wall Street Journal (WSJ) and others on the 8th (local time), SEC Chairman Gary Gensler said during a virtual conference that "I have instructed staff to explore how we can update our regulations and find a holistic approach to improve efficiency in the stock market, especially for retail investors," presenting this proposal.
Currently, more than 90% of small trades by retail investors are routed to wholesale traders who process them all at once at their preferred timing. Small brokerage firms have been sending customer order information not to official stock exchanges but to trading firms like Citadel Securities, which engage in high-frequency trading, and receiving compensation for this. Robinhood, popular among individual investors, has generated revenue by selling such stock order information while offering commission-free trading.
Chairman Gensler believes that under this system, individual orders are unlikely to be executed at the most appropriate time. He said, "There is a cost to small trades under the current system." He added, "It is unclear whether our domestic market system is as fair and competitive as possible for investors," and "I think there is something we can do for small investors." He also noted that these discussions are still in the early stages and that he will listen to related concerns.
Trading firms that conduct wholesale trades with platforms like Robinhood have pushed back. Joe McCain, head of Citadel Securities, a U.S. securities trading firm, expressed concern, saying, "Small changes can have unpredictably huge impacts on the market." Dan Gallagher, Chief Legal Officer (CLO) of Robinhood, said, "The current environment is very favorable for small investors, and it is concerning to interfere and disrupt this."
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