The U.S. Securities and Exchange Commission (SEC) is still weighing its response to the meme-stock frenzy, but its executive admitted investors were among the losers when brokerage firms abruptly curtailed trading in late January.
“The restrictions on transactions on that fateful Friday in January were not good for retail investors who wanted to access the markets,” SEC Chairman Gary Gensler told Yahoo Finance’s All Markets summit.
That “fateful Friday” was January 29, when several brokerages restricted trading in GameStop and other memes that were drawing attention to the WallStreetBets reddit thread.
Retail investors barred from buying more stocks were baffled that they could still sell or close those positions, fueling theories that hedge funds and wholesale market makers were forcing brokerage firms to shut down the meteoric rise in stock prices even.
The SEC, however, released a report last week attempting to debunk that narrative. The report notes that the restrictions were largely the result of an increase in margin requirements that clearing houses (which themselves regulate transactions) demanded brokerages hold given the massive volatility of these. actions.
The report suggested that shorter settlement times could reduce the likelihood of unexpected margin requirements – and therefore the need to restrict trade – in the future. But the report did not detail any specific political action for the future.
Prohibit payment for order flow
Gensler told Yahoo Finance that, among other policy considerations, banning the practice of payment for order flow remains an option.
The model, which enabled commission-free transactions popularized by Robinhood, relies on routing orders through wholesale market makers like Citadel Securities and Virtu Financial. These middleman firms try to execute trades at better prices than what the customer asks for, dividing the cost savings between themselves and the brokerage that routed the order.
Gensler said “inherent conflicts” could prompt brokerage firms to gamify stock bets in order to increase trading volume.
[Read: How do brokerage firms make money]
“When you have efficiency, it’s lower cost in the middle, it’s better for the companies raising funds and it’s better for the investor,” Gensler said, referring to possible changes to the fund. payment flow template for orders. “It may mean that there is a little less economic rent for the people in the middle.”
Gensler said the SEC broadly supports retail investing, noting that families should be allowed to use stock betting if they wish to build up a retirement nest egg, among other reasons.
“Retail is part of the [investing] mix – and a growing part of the mix – can be good as long as there’s a real cop on the beat watching the rules in place, ”Gensler said.
Brian Cheung is a reporter covering Fed, Economics and Banking for Yahoo Finance. You can follow him on Twitter @bcheungz.
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