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Gensler Focuses on Citadel Securities as SEC Consider Payment for Order Flow Ban




Wall Street’s top cop said Tuesday that Citadel Securities’ dominance in order flow routing may not be offering retail investors the best deal.

U.S. Securities and Exchange Commission Chairman Gary Gensler Told Senate Banking Committee He Is Concerned About Citadel Securities 47% market share on all listed retail volume in the United States. Virtu Financial (VIRT), another wholesaler, controls around 25-30%.

I’m a pro competition, and I’m not sure the order flow payment system is really the best competitive landscape, Gensler said.

Gensler did not mention Citadel Securities by name, but footnotes in SEC chairs prepared remarks made.

The SEC did not rule out the possibility of a total ban when paying for order flow, the practice of a brokerage house (like Robinhood) passing stock purchase orders to a wholesaler (like Citadel Securities) to locate and execute them.

When these wholesalers find a stock at a lower price than what the investor ordered, the savings are split between the wholesaler and the brokerage, who can then pass the cost savings on to the investor in the form of a better price. The order flow payment model is one of the main reasons brokerage firms like Robinhood (HOOD) can offer commission-free trades.

Wholesalers also get discounts from exchanges like the New York Stock Exchange for providing liquidity, thus strengthening their role as intermediary in stock transactions.

I think the conflicts inherent in order flow payment and exchange discounts can both make our markets less efficient, Gensler said.

Yahoo Finance reported that Gensler raised the issue of the concentration of retail order flows at the first White House Competition Council meeting last Friday, a move by President Joe Bidens to push federal agencies to curb sales. anti-competitive behavior.

Everything on the table

Questions remain about how the SEC will proceed with any reform.

The former Goldman Sachs banker hinted at not only the possibility of banning payment from the order flow, but also rethinking discounts and how prices are benchmarked against criteria set by National Best Bid and Offer ( NBBO).

In this area, everything is on the table, Gensler said, adding that the SEC’s sole objective is to encourage competition to reduce costs and increase the efficiency “of the structure of the stock market.

Once an obscure mechanic of the brokerage industry, order flow payment gained national attention during the frenzy of early 2021 on meme stocks like GameStop (GME).

Robinhood, who became public at the end of July, relied heavily on payment for order flows and saw its the firm’s revenues almost tripled in 2020.

Many brokerages have followed Robinhood by leaning more into order flow payment as they eliminated commissions, although Fidelity remained resistant to the model.

After being taken to Capitol Hill to testify after the rise of GameStop froze some trading activity, Citadel Securities Ken Griffin said paying for the order flow has been of benefit to the brokerage industry and the investor retail in general.

This has been very important for the democratization of finance, it has allowed the US retail investor to have the lowest cost of execution he has ever had in the history of the US financial market, said Griffin.

Gensler said on Tuesday that the SEC was set to release its report on the memes stock episode, noting that other SEC commissioners were currently reviewing it.

Brian Cheung is a reporter covering Fed, Economics and Banking for Yahoo Finance. You can follow him on Twitter @bcheungz.

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