Gary Gensler, the Chairman of the Securities and Exchange Commission (“SEC”), has decided to take a much-needed stand against the large players of Wall Street. New rules are up for a vote to limit the power that some of the most important participants in the stock market have over individual retail investors. The proposed rules have the large firms and companies upset about the potential losses to their bottom line and have retail investors excited about the prospects of finally having a level playing field. All the more reason for the SEC to enforce the proposed rule changes, save our markets from corruption, and bring fairness to all involved in the trading process.

It’s no secret that the United States Stock Markets have a reputation for being skewed toward wealthy insiders that have knowledge of upcoming financial reports or imminent financial policies. Elected officials have consistently outperformed the market, especially in sectors in which they are involved in legislation and policy changes.[i]Recently, high-ranking officials at the Federal Reserve engaged in trading on information that was not yet disclosed to the public.[ii] Perhaps the most well-known recent market scandal was the GameStop saga that saw one of the most popular retail stock exchanges take away the buy button, causing mass losses for individual retail investors.[iii] These constant events exhibit the uphill battle that individual retail investors face when investing in the stock market.

Furthermore, the market structure leaves individual retail investors at a significant disadvantage compared to their counterparts. Currently, a retail investor will buy or sell a stock with their stockbroker. The stockbroker will then send the order to the market maker, which oversees pairing the order together at the best possible price. During this stage of the trade, brokers may receive compensation from market makers in exchange for sending their stock orders. This process, known as “payment for order flow,” does not always give retail investors the best possible deal on their trade.[iv]Moreover, the process can be riddled with conflicts of interest because there are several firms that are brokers, market makers, and institutional investors all in one.[v] Thus, these firms can see every retail trade as it comes through and alters their trading strategies once they have this information. Payment for order flow is banned in some other countries because of the many conflicts of interest that can arise.[vi]

At the end of 2022, the Securities and Exchange Commission proposed rule changes to how retail investor’s orders are filled and routed. The most important and potentially controversial rule the SEC presented would “require certain orders of individual investors to be exposed to competition in fair and open auctions before such orders could be executed internally by any trading center that restricts order-by-order competition.”[vii] This rule serves as a limitation on payment for order flow without banning it outright. Retail investor stock orders would get the best possible price on their trade with the proposed rule change due to the open market competition. Critics of the proposed rule changes argue that retail investors will now have to pay higher prices on their trades due to the competition between brokers and market makers. It is likely that the high-powered firms in the markets will focus many resources on making sure the SEC does not pass this rule proposal. The lack of media coverage over this massive attempt at market structure reform is already evidence of the firms trying to squash the change. The rule will hurt their bottom line, which is their number one priority.

 The SEC needs to take a serious look at banning all elected officials from trading on the stock market as well. There is no reason for a person who has nonpublic knowledge of American companies and policies to exploit the knowledge and profit from it. If the average retail investor traded on this type of knowledge, they would be prosecuted by the SEC. Lastly, steep fines need to be levied on firms that use information gathered in their positions as brokers and market makers to make gross profits off the backs of retail investor trades. The million-dollar fines that are currently enforced are pennies in comparison to what the firms make using their insider information.

The American Stock Market needs a heavy reformation to weed out the rampant conflicts of interest and insider trading that occur so frequently. Retail investors that simply want to earnestly better their financial situation face so many obstacles in doing so. The proposed rule changes by the SEC are a step in the right direction and must be passed to get the ball rolling. The American Stock Market has a long way to go to shed its corrupt reputation, but the SEC has taken the first step in ensuring that it’s a better market for the next generation of retail investors.

[i] See Alicia Parlapiano, Adam Playford & Kate Kelly, These 97 Members of Congress Reported Trades in Companies Influenced by Their Committees, The N.Y. Times (Sept. 13, 2022), https://www.nytimes.com/interactive/2022/09/13/us/politics/congress-members-stock-trading-list.html (detailing the number of elected officials in Congress who outperformed the market in the last year and the trades they made that conflict with sectors that they are involved in).

[ii] See Doug Walker, As Explosive New Facts About Federal Reserve Insider Trading Scandal Are Revealed, Better Markets Renews Call For The Fed To End Its Cover Up And For An Investigation By The Justice Department, Better Markets (Jan. 6, 2022), https://bettermarkets.org/newsroom/as-explosive-new-facts-about-federal-reserve-insider-trading-scandal-are-revealed-better-markets-renews-call-for-the-fed-to-end-its-cover-up-and-for-an-investigation-by-the-justice-department/ (exposing a former Federal Reserve Vice Chair for violating policy and continuing to trade based on nonpublic imminent financial policy changes).

[iii] See Maggie Fitzgerald, Robinhood restricts trading in GameStop, other names involved in frenzy, CNBC (last updated Jan. 28, 2021, 5:34 PM), https://www.cnbc.com/2021/01/28/robinhood-interactive-brokers-restrict-trading-in-gamestop-s.html (explaining how the most popular retail investor stockbroker removed the buy button on the most popular stocks, leading to massive losses for those investors).

[iv] See Nick Dey, Payment for Order Flow: The Conflict That is the Secret to Robinhood’s Success, Investors Observer (July 15, 2021, 4:02 PM), https://www.investorsobserver.com/news/featured/payment-for-order-flow-the-conflict-that-is-the-secret-to-robinhoods-success (describing how brokers face a huge conflict of interest when trying to balance the best interests of their customers while protecting the revenue from market makers).

[v] See Katherine Burton & Katherine Doherty, Citadel’s Market Maker Posts Record Revenue; Hedge Fund Surges, Bloomberg (last updated Jan. 5, 2023, 4:07 PM), https://www.bloomberg.com/news/articles/2023-01-05/ken-griffin-s-citadel-securities-posts-record-revenue-hedge-fund-surges#xj4y7vzkg (emphasizing Citadel Securities position as both a market maker and hedge fund, while also mentioning their massive profits).

[vi] See Laurie McAughtry, EU lawmaker confirms PFOF ban, The Trade (July 27, 2022, 7:44 AM), https://www.thetradenews.com/eu-lawmaker-confirms-pfof-ban/ (“PFOF is already banned in the UK and Canada, with the UK’s FCA stating that: ‘PFOF in relation to retail and professional client business is incompatible with our rules on conflicts of interest and inducements, and risks compromising firms’ compliance with best execution.’”).

[vii] SEC Proposes Rule to Enhance Competition for Individual Investor Order Execution, U.S. Sec. and Exch. Comm’n (Dec. 14, 2022), https://www.sec.gov/news/press-release/2022-225.