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The SEC is set to reveal proposals to transform the US stock market, by routing retail stock orders to auctions

SEC Chair Gary Gensler.

Evelyn Hockstein/Pool via AP

  • The SEC is considering sending retail stock orders to auctions under a new proposal, reports said Tuesday.
  • Trading firms could be forced to compete in auctions to execute retail stock orders under the planned proposals.
  • It comes after the regulator focused on payment-for-order flow as a barrier to market efficiency.

The Securities and Exchange Commission is getting ready to outline its plan to overhaul how the US stock market operates — which could see trading firms compete in auctions to carry out retail stock orders.

The regulator’s chairman, Gary Gensler, will lay out some of its potential changes in a speech Wednesday, according to several reports citing people familiar with the matter.

The formal proposals could come as soon as this summer or early fall, the Financial Times reported Tuesday. The SEC did not immediately respond to Insider’s request for comment. 

The SEC has been exploring ways to drive greater efficiency in the stock market for small investors since the GameStop saga in early 2021, when retail traders drove a massive spike in shares of meme-stock companies.

It plans a possible proposal to force trading firms to directly compete in auctions for retail stock orders, according to Bloomberg and the Wall Street Journal. If those rules go ahead, the new model would significantly alter the functioning of the stock market. 

Last year, Gensler asked the regulator’s staff to suggest recommendations on a variety of market rules, including the hefty fees paid to Wall Street brokers for carrying out small-investor orders and the rise of commission-free brokerage apps.

It put a spotlight on payment for order flow, which is when brokerage firms receive compensation for sending customers’ stock-trading orders to market makers like Virtu Financial and Citadel Securities to execute, rather than sending them directly to an exchange.

Critics say that creates a potential conflict of interest between the brokerage and the customer, and could lead to less-favorable execution prices for the retail investor.

The regulator started looking into the practice after traders used social platforms like Reddit to raise prices of heavily-shorted stocks like GameStop, ultimately driving a more than 1,200% surge in the video-game retailer’s stock last year. 

Gensler said last year he wanted to save investors money by toughening regulations around profits made in the financial industry.

His main target, he said, was to give investors the best possible price on their orders. That means they receive the highest price when an investor is selling, and the lowest price if they are buying stocks.

Brokers profit when investors trade,” Gensler said at the time. “For those brokers who have these arrangements — and not all do — higher trading volume generates more payment-for-order flow.”

“What makes the current zero-commission brokerage environment different is that investors do not see their costs as they’re executing trades, so they may perceive them as free.”

The SEC is considering other potential changes, reports said. These include adjusting the display prices and trading data on stock exchanges, so that venues like the Nasdaq or the New York Stock Exchange can better compete with wholesalers. 

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