Robinhood, Market Makers Vow to Fight SEC Trading Reforms

Robinhood (HOOD) and allied market makers together with Virtu Monetary (VIRT) have come out towards newly proposed guidelines that, if handed, would quantity to the most important change in securities market regulation in over a decade.

Each corporations’ shares are down greater than 7% since Wednesday’s market open, with Virtu struggling its largest intraday decline since April on Thursday.

Key Takeaways

  • Two new guidelines proposed by the Securities and Change Fee (SEC) have incensed Robinhood and the market makers who’re its principal income.
  • The foundations are a part of a package deal of 4 guidelines that would be the largest change to the regulation of inventory buying and selling in over a decade.
  • One rule considerably will increase disclosure from brokers receiving fee for order circulate.
  • The opposite would mandate inventory trades undergo an public sale earlier than they are often executed by market makers beneath fee for order circulate preparations.

The proposed guidelines take goal at fee for order circulate (PFOF), the order execution course of that many brokerages, together with Robinhood, say helps them supply zero-commission trades. One rule would drive brokers to indicate how they obtained the perfect execution for trades for which they obtain fee for order circulate. One other would require orders from retail buyers to be auctioned off for greatest execution in public marketplaces, equivalent to a securities trade, earlier than they might be executed by a market maker. The SEC estimates that auctions for execution might save retail buyers $1.5 billion yearly, or 1.08 foundation factors of the turnover on such trades.

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The rule modifications pose a menace to the enterprise fashions of market makers equivalent to Virtu and Citadel Securities, in addition to brokers that depend on their funds. Lucas Moskowitz, Robinhood’s deputy basic counsel, criticized the SEC’s proposals, telling Bloomberg Information they’d “resurrect discriminatory boundaries to entry and harm tens of millions of retail buyers.” He additionally complained the proposal’s 60-day public remark interval is simply too quick for “a package deal of this measurement and complexity.”

On the opposite finish of the spectrum, retail investor advocates argue the SEC ought to have banned fee for order circulate altogether.

The SEC says it is unlikely commission-free trades will disappear if fee for order circulate is restricted. Many massive brokerages make extra from different sources, together with margin lending and share loans to short-sellers.

The foundations are anticipated to profit the general public exchanges that may host the execution auctions, together with New York Inventory Change proprietor Intercontinental Change (ICE) and Nasdaq (NDAQ).

The SEC has grown more and more involved that the parsing of buying and selling executions amongst public exchanges, market makers, and darkish swimming pools has diminished the transparency of securities buying and selling and raised its prices for people. “The markets have turn out to be more and more hidden from view, particularly for particular person buyers,” stated SEC Chair Gary Gensler in ready remarks backing the rule modifications. “These on a regular basis particular person buyers don’t have the complete profit of assorted market contributors competing to execute their marketable orders at the perfect worth attainable.”

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One of many different two guidelines is much less focused at Robinhood, however will doubtless be opposed by market makers. It could scale back the scale of inventory ticks to a tenth of a penny, and require market makers, who presently execute trades at costs all the way down to a hundredth of a cent, to commerce shares utilizing the identical tick sizes as exchanges. The final rule would develop disclosure necessities about inventory pricing information for brokerages with greater than 100,000 prospects.