How The Stock Market Functions Is Completely Changing?
This article is more than 2 years old
Keep a close eye on the stock market for the next couple of months. But not for the reason you may think. The latest Wall Street news hints at the potential for significant changes.
A new rule was proposed on Wednesday that could fundamentally alter how the stock market works on the backend. The Securities and Exchange Commission floated the proposed rule, which now faces a final vote in the spring. However, experts have every reason to believe it will pass that vote.
According to CNN, the change “would add competition to an unseen — but potentially costly — part of the stock trading system for retail investors.” That unseen part of the stock market is the complex mechanisms that power trading. Currently, when you click buy or sell on a stock, the action feels instant.
However, a complex network of actions is in constant motion to make your trade possible. And that network regularly exploits price differences to pocket a huge profit. “When you tap buy or sell, the broker, such as Robinhood or E*Trade, takes your order to a firm known as a wholesaler or market maker — middlemen firms that are supposed to get you the best price.”
Those wholesalers pay to conduct the trades in a process called “payment for order flow.” Brokers don’t receive much money for each transaction. However, the high volume of daily trades means they make a lot of money.
Data from the SEC shows that six wholesalers paid $235 million to brokers. In the first quarter of 2022 alone. So now the practice of payment for order flow has come under scrutiny.
“The SEC notes that wholesalers typically execute trades ‘without providing any opportunity for other market participants to compete to provide a better price.'” It ultimately leads to massive increases in wealth for large firms. But the everyday investor suffers.
And that is where the proposed stock market changes come in. It will mean good news for investors as long as they pass the final vote next year. The SEC wants to make significant adjustments to the middleman (or wholesaler) level.
Gary Gensler, the SEC Chair, said their focus should be on individuals rather than corporations. “The markets have become increasingly hidden from view, especially for individual investors. Thus, today’s proposal is designed to bring greater competition in the marketplace for retail market orders.”
It will route all buy and sell orders to auction houses. There, various trading firms will compete to execute the orders. This move will add a brand-new layer of competition, which is great news for the entire trading environment.
Gensler hopes to level the stock market playing field. Large firms will no longer be the only players receiving the best prices on their stock market trades. Theoretically, the new rules will open this option up to individuals.
All this is possible thanks to Gensler. He “has been a longtime critic of the way the current payment for order flow market operates, arguing that it lacks transparency and competition to the detriment of investors.” And he has finally taken steps to rectify the problem.
