Wall Street’s top cop said Tuesday that the dominance of Citadel Securities in the business of routing order flow may not be giving retail investors the best deal.
U.S. Securities and Exchange Commission Chair Gary Gensler told the Senate Banking Committee that he’s concerned about Citadel Securities’ 47% market share over all U.S.-listed retail volume. Virtu Financial (VIRT), another wholesaler, controls about 25% to 30%.
“I’m pro competition, and I’m not sure the payment for order flow system really is the best competitive landscape,” Gensler said.
Gensler did not mention Citadel Securities by name, but footnotes in the SEC chair’s prepared remarks did.
The SEC has not ruled out the possibility of a full ban on payment for order flow, the practice of a brokerage (like Robinhood) passing on stock orders to a wholesaler (like Citadel Securities) to actually locate and execute.
When those wholesalers find a stock at a cheaper price than the investor ordered, the savings are split by the wholesaler and the brokerage — who can then pass on cost savings to the investor in the form of a better price. The payment for order flow model is a major reason why brokerages like Robinhood (HOOD) can offer zero commission trades.
Wholesalers also get rebates from exchanges like the New York Stock Exchange for providing liquidity, entrenching their roles as middlemen in stock trades.
“I think the inherent conflicts of payment for order flow and rebates on the stock exchanges both may make our markets less efficient,” Gensler said.
Yahoo Finance reported that Gensler raised the issue of concentration of retail order flow in the first meeting of the White House’s Competition Council last Friday, President Joe Biden’s initiative to push federal agencies to curb anti-competitive behavior.
‘All on the table’
Questions remain about how the SEC will proceed on any reform.
The former Goldman Sachs banker alluded not only to the possibility of banning payment for order flow, but rethinking rebates and the way that prices are referenced under the benchmarks set by National Best Bid and Offer (NBBO).
“In this area, it’s all on the table,” Gensler said, adding that the SEC’s single goal is to encourage competition “to lower the cost and raise the efficiency" of the equity market structure.
Once an arcane mechanic of the brokerage industry, payment for order flow earned the national spotlight during the early 2021 frenzy over meme stocks like GameStop (GME).
Robinhood, which went public in late July, has relied heavily on payment for order flow and saw its revenues from the practice nearly triple in 2020.
Many brokerages followed Robinhood in leaning more heavily on payment for order flow as they eliminated commissions, although the likes of Fidelity have remained resistant to the model.
After being pulled to Capitol Hill to testify after the run-up in GameStop froze some trading activity, Citadel Securities’ Ken Griffin said payment for order flow has been helpful to the brokerage industry and the retail investor at large.
“This has been very important for the democratization of finance, it has allowed the American retail investor to have the lowest execution cost they’ve ever had in the history of the U.S. financial market,” Griffin said.
Gensler said Tuesday the SEC is close to publishing its report on the meme stock episode, noting that other SEC commissioners are currently reviewing it.
Brian Cheung is a reporter covering the Fed, economics, and banking for Yahoo Finance. You can follow him on Twitter @bcheungz.
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