Why stocks are tumbling again
New York (CNN Business)The agency that oversees Wall Street is weighing major changes to the way millions of everyday investors buy and sell stocks. That could be bad news for so-called free-trading apps like Robinhood as well as the lesser known firms that underpin their business models.
Today, when you buy or sell a stock on an app, the trade appears to be instantaneous. But beneath that simple buy/sell action is a complex web of Wall Street players exploiting tiny differences in price to rake in huge amounts of cash.
Here’s how it works: When you tap buy or sell, Robinhood (or your broker of choice), takes your order to a firm known as a wholesaler or market maker — the middlemen who are supposed to get you the best price and who pay the brokers for the privilege of executing the trades. They typically make pennies off each transaction.
That process is known as “payment for order flow,” and it has come under intense scrutiny by regulators following the fallout from the January 2021 run-up in meme stocks like GameStop.
The GameStop frenzy “exposed how rigged the US equity markets are to enrich big Wall Street firms, high frequency trading firms and brokers at the expense of Main Street retail investors,” Better Markets CEO Dennis Kelleher wrote at the time.
The Securities and Exchange Commission has been reviewing the system, which accounts for the bulk of the brokerages’ revenues. In August last year, Robinhood’s stock tumbled after SEC Chairman Gary Gensler said that an outright ban of payment for order flow was “on the table.”
Gensler and other critics of the process say the brokers and market makers, such as Citadel Securities, have a clear conflict of interest, and that payment for order flow screws over everyday investors while amassing huge wealth for Wall Street firms.
Now, it appears that the SEC may roll out new rules as early as Wednesday, according to The Wall Street Journal, citing unnamed sources.
One proposed new rule, the paper said, would add more competition at the middleman level to ensure retail investors are actually getting the best prices. In that scenario, orders would be routed into auctions where trading firms would have to compete to execute them.
The SEC didn’t immediately respond to CNN Business’ request for comment.
A spokesperson for Robinhood didn’t comment specifically on the potential changes but pointed to research from MIT that shows retail investors saved more than $17 billion in trading fees thanks to free-trading apps 2020 and 2021.
— CNN Business’ Matt Egan contributed to this article.
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