"Fair Competition for Ants"... U.S. SEC Officially Moves Forward with Stock Trading Regulation Proposal

[Asia Economy Reporter Jeong Hyunjin] The U.S. Securities and Exchange Commission (SEC) has taken action to improve the business practices of stock trading platforms like 'Robinhood,' which maximize profits by selling individual investors' trading information gathered through zero-commission trades (Payment for Order Flow, PFOF).

[Image source=AP Yonhap News]

According to the Wall Street Journal (WSJ) and others on the 14th (local time), the SEC announced four proposals related to stock trading methods, which were voted on and passed by a five-member commission. The proposal, aimed at creating a fair playing field for investors, will undergo a public comment period until March 31 of next year.

The SEC does not ban PFOF, which involves selling individual investors' information, but has improved the system so that individual investors' stock orders can go through an auction process. Additionally, it requires brokerage firms to establish regulations related to 'best execution,' ensuring orders are executed under optimal conditions, and mandates detailed disclosure reports on trading activities by brokers like Robinhood. The focus is on increasing transparency in trading processes and fostering fair competition.

Since the COVID-19 pandemic triggered a boom in the stock market, stock trading platforms (brokerages) like Robinhood have grown significantly. These brokers adopted a policy of charging no separate trading fees to attract investors. Instead, they generated revenue by selling individual investors' order data to high-frequency trading firms such as Citadel Securities and receiving fees in return. This process raised concerns that brokers prioritized the interests of high-frequency trading firms paying fees over those of individual platform users.

[Image source=Reuters Yonhap News]

This proposal comes more than a year after SEC Chairman Gary Gensler stated his intention to introduce regulations, citing threats to 'healthy competition.' Bloomberg described it as "the biggest change in order trading methods since 2005." The Securities Industry and Financial Markets Association (SIFMA) commented, "The enormous changes resulting from the SEC's proposal are so complex that they will affect all market participants, especially investors," and added, "The SEC must approach this with extreme caution."

If this proposal is approved and implemented by the commission, brokerage firms are expected to be impacted. In particular, firms like Citadel and Virtu Financial, which have earned substantial profits from this trading, will face challenges. Bloomberg reported that following the SEC's proposal announcement, Virtu's stock price plummeted more than 7%, and Robinhood's stock price fell by up to 4.4%.

Bloomberg also reported that the SEC estimates retail investors could save $1.5 billion annually (approximately 1.95 trillion KRW) by introducing the auction system. CEO Gensler emphasized that this measure addresses the issue that "the market is becoming less visible, especially to individual investors," and stated, "(This measure) will increase competition and benefit both retail and institutional investors."