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Changes are coming to the ways Wall Street disseminates price quotes and handles the orders of the individual investors known as retail traders.
As soon as Wednesday, Securities and Exchange Commission Chairman Gary Gensler could air some proposals to shake up current arrangements in which brokers route retail orders to computerized market makers like
Virtu Financial
(ticker: VIRT) and Citadel Securities, who pay the brokers for this order flow. These payments for order flow largely underwrite the no-commission trading model pioneered by
Robinhood Markets
(HOOD) and copied by the likes of
Charles Schwab
(SCHW).
The Wall Street Journal reported that Gensler may outline proposals for rerouting retail orders in a speech scheduled for noon EDT at Wednesday’s
Piper Sandler
conference of companies in the exchange and financial technology industries. Gensler and others have expressed concerns that order-flow payments create conflicts that might hurt retail traders.
One idea described by the Journal would change how brokers handle so-called market orders, in which a trader seeks to buy or sell shares at whatever prices prevail at the time, instead of putting limits on what price the trader will accept. Off-exchange market makers like Virtu have gotten a big hunk of these orders by paying for order flow and offering traders slightly better pricing than exchanges. The SEC would require retail brokers to route market orders to a new kind of auction mechanism that would let many firms compete to fill the orders, the Journal reported.
The SEC wouldn’t comment on the reported routing rules. Virtu said that wholesale market makers like itself have saved traders billions by giving them better pricing than exchanges.
News of the potential changes seemed to shake shares of Virtu, which slipped 2.4% in Tuesday trading, to $23.90, even as the
Nasdaq Composite
edged up 0.6%. Shares of Robinhood slid 6%, to $8.56.
Such rerouting of Wall Street’s infrastructure would surely face court challenges by the affected players. That’s what happened when the SEC issued rules to reform how price quotes are disseminated.
In the past century, stock market prices have evolved from ticker tape and chalkboard to electronic feeds. Two kinds of feeds exist today. “Consolidated” or “core” data supplies basic information, including the price and volume of a stock’s last trade, and the best bid and offer quote on the nation’s exchanges.
At a far higher cost, exchanges supply proprietary direct feeds that show additional information, such as bids and offers at price levels below or above the best bid and offer; quotes for odd-lots below 100 shares; and data from a stock’s opening and closing auctions. Direct feeds also can arrive far faster.
In a 2020 rule, the SEC called for exchanges to expand the core data to include odd lots and quotes going five levels beyond the top of their order books. The Market Data Infrastructure Rule also broke the exchange data monopolies and required them to offer data to competing consolidators who might charge lower prices or create different data offerings.
A court challenge to Market Data rule—by Nasdaq and other exchanges—was rebuffed May 24 by the U.S. Court of Appeals for the District of Columbia. It may take a couple of years for the expanded data to start appearing on the consolidated feed.
But the fate of competing data vendors will be determined by a second court challenge that the D.C. Circuit could rule on any day. The question is whether the court upholds the SEC’s data governance revamp.
The SEC ordered changes in the bodies that govern the raw data feeds and decide their cost. Exchanges have controlled these governing bodies, and when they proposed prices last November to supply raw data to competing consolidators, the would-be competitors complained the prices were prohibitively high.
The SEC wants to require the data governors to include representatives from investment firms and brokers—in the hopes that will lead to lower pricing, and perhaps higher data speeds.
Write to Bill Alpert at william.alpert@barrons.com
Read More: SEC to Propose Big Changes in Stock Trades and Quotes