The U.S. Securities and Exchange Commission will stop short of banning payment for order flow, a controversial way to process retail stock trades, as it proposes new rules for the $48 trillion American equities market.
The decision, described by people familiar with the matter, follows months of internal deliberations at the agency. It marks a win for brokerages that get paid for processing rights, although the SEC may still enact other changes that make the practice less profitable, according to the people.
The regulator, which is expected to unveil its plans in the coming months, declined to comment.
Wall Street has been on edge since Gary Gensler signaled last year that the agency may outlaw payment for order flow during the overhaul. The practice often involves one brokerage routing retail stock trade orders to another firm for execution rather than to the New York Stock Exchange or Nasdaq.
The arrangements are pitched as giving investors the benefits of greater liquidity, but critics have questioned whether traders actually are getting the best price, with some of their potential profits going to the firm that bought the trading rights.
Meme Stock Madness
Long the subject of wonky, market structure debates, payment for order flow crashed in to the U.S. political mainstream during the meme stock madness of 2021.
Unlike some countries where the practice is banned, the arrangements are common in the U.S. and represent a chunk of revenue for Charles Schwab Corp. and Robinhood Markets Inc. Those retail-focused brokerages sell the rights to execute their clients' trade orders to firms like Citadel Securities and Virtu Financial Inc.
Robinhood rose by as much as 12% and Virtu by 11% in New York trading on Thursday.
After taking a hard line for months, senior SEC officials have signaled in recent meetings with executives that a ban is no longer on the table, the people said, asking not to be named discussing private conversations. They said the SEC now appears to be focused on other ways to make the market more transparent following pushback from industry.
Commission-Free Trading
Backers of payment for order flow say it's responsible for widespread commission-free trading in the U.S.
Since 2019, most major online brokerages haven't charged retail clients fees for their transactions, following a model made popular by Robinhood. Legions of traders who put money in the market for the first time during the Covid-19 pandemic have known nothing else.
