SEC wants to make the U.S. stock market more transparent
The Securities and Exchange Commission (SEC) decided to make changes that will make the U.S. stock market more flexible and accessible to companies that provide financial services to retail traders. The innovations will primarily affect the business model of such brokers as E-Trade and Robinhood.
According to the SEC, the new rules will take effect shortly and will be the biggest changes in the American market over the past 10 years. Their main goal is to increase competition among brokers who provide services via mobile applications to a large number of users.
The rules will address a pay-for-order-flow approach like PFOF. This option regularly lends itself to criticism because it is essentially a rollback. PFOF is used by TD Ameritrade, E-Trade, and Robinhood, which receive payment for orders from market makers operating on wholesale terms.
According to the innovations of the Commission, retail brokers will now have to send orders of clients belonging to the group PFOF, exclusively to the market-maker who can offer the best deal conditions, and not the one who pays a larger kickback. Thus, the authorities want to make the activities on the stock market more transparent and improve competition between brokers. Retail traders will be able to carry out a transaction on those terms that are currently the most suitable.
The Commission says that they want to give brokers the opportunity to choose the best price for the investor, and this requires the creation of a certain standard, which should be equal to all participants of the market. Now in this segment, there is a relationship where a few companies have taken control of most of the processes, and the rest are not able to fully develop.
The SEC also requires companies to provide full information on the execution of orders. The commission hopes that such information will help investors. In addition, brokers will have to make a status report every month and develop recommendations that will improve prices. Separate attention will be paid to the accounting of commissions and the timing of transactions.
It should be noted that the increase in interest rates of the Federal Reserve and the instability of cryptocurrencies had a negative impact on popular market players such as Robinhood. The broker’s stock dropped 15% at the beginning of the year, significantly worsening the outlook for the current period. The platform is focused on beginner traders, and they are probably in no hurry to act during the economic downturn and rising inflation. This is reflected in the number of active Robinhood users, which fell to 17.3 million, although forecasts said 19.8 million.