The Securities and Exchange Commission’s top boss unveiled a plan on Wednesday that he said would make sure retail traders — including those behind last year’s “meme stock” mania — get a fair deal. 

The proposed changes put the SEC on a potential collision course with brokers that offer free trading like Robinhood, TD Ameritrade and E*Trade. 

Currently, these services make money through a process called “payment for order flow,” in which third-party firms like Citadel Securities and Susquehanna pay for the privilege of executing the trades themselves. The third-party firms, also known as “market makers,” then pocket the difference between the buying and selling price of a given stock or option. 

In what would be a major overhaul of the payment for order flow system, Gensler wants to require market makers to directly compete to execute trades from retail investors to boost competition. He also said the new SEC rules would mandate market makers disclose more data around the fees these firms earn and the timing of trades for the benefit of investors.

“I asked staff to take a holistic, cross-market view of how we could update our rules and drive greater efficiencies in our equity markets, particularly for retail investors,” Gensler told an industry audience in a speech on Wednesday.

Gensler’s announcement, the biggest shake-up of US equity market rules in over a decade, will likely lead to formal proposals this fall. The public can then weigh in on them ahead of an SEC vote to adopt them.

Gensler’s proposal was quickly met with pushback from a top executive at Robinhood, who argued that the current system gives enormous benefits to individual traders. 

“It is a really good climate for retail, so to go in and muck with it right now, to me, is a little worrisome,” the free trading app’s chief legal officer, Dan Mr. Gallagher said on Wednesday, according to the Wall Street Journal. 

Payment for order flow came under regulatory scrutiny last year when an army of retail investors went on a buying spree of “meme stocks” like GameStop and AMC, squeezing hedge funds that had shorted the shares. Many investors purchased shares using commission-free brokers such as Robinhood.

The new rules would enhance order-by-order competition, including via potential “open and transparent” auctions, aimed at providing investors better prices. They would include an agency-specific definition of so-called best execution for equities and other securities to ensure broker-dealers and investors benefit from more detail around the procedural standards brokers must meet when handling and executing customer orders.

They would require broker dealers and market centers to disclose more data around order execution quality to benefit investors, including a monthly summary of price improvement and other statistics, Gensler said.

The rules would also seek to shrink the minimum pricing increment, or so-called tick size. to better align with off-exchange activity and harmonize the tick size to ensure all trading occurs in the minimum increment.

The proposed rule changes will include an SEC definition of “best execution” requirements that would force retail brokers to send their customers’ orders to auctions, run by exchanges or off-exchange trading venues, which would allow market participants to compete to trade against the orders, the sources said.

Currently, retail brokerages can send customer orders directly to a wholesale broker to be executed, as long as the broker is matching or bettering the best price available on US exchanges. Large market-makers typically improve on the best price by a fraction of a cent. Gensler has criticized this model as limiting competition for retail orders.

The rules would require retail brokers to send PFOF customer orders to the wholesaler offering the best deal, rather than the one that pays the most.

This would fundamentally alter the business model of wholesalers, which can make more money by executing retail investor orders internally than they do on public exchanges, where they might find themselves trading with other sophisticated trading firms or institutional investors.

“It’s great to see the SEC taking a holistic approach to this problem — there’s not a single answer, we need changes to different parts of the market,” said Dave Lauer, CEO of financial platform Urvin Finance.

“We need an order-by-order standard for best execution and open competition for order flow in order to provide the best outcomes for retail investors. This will force greater competition, and could help to end the off-exchange oligopoly that has controlled that market for too long,” he added.

Investor advocates want to boost exchanges’ competitiveness to improve the reliability of the national pricing benchmark, known as the National Best Bid and Offer.

With Post wires