Wall Street pushes back as SEC targets business practice that generated billions

Trading firms and brokers have stepped up their lobbying efforts and campaign donations to Republicans seeking to gain control of Congress in next year’s midterm elections. He has been particularly vocal about Mr Gensler’s investigation into payment for order flows, whereby some brokerages sell their clients’ stock and options orders to high-speed trading firms that execute trades.

At stake, the industry says, is a year-long trend toward commission-free trading that has encouraged millions of Americans to invest in the stock market. Mr Gensler says payment for order flow obscures trading costs for investors and has isolated the practice in a broader campaign to make capital markets more efficient, competitive and transparent. He acknowledges that this effort could turn a profit for the financial industry.

The SEC hasn’t issued a formal resolution to change the stock-market rules, but Gensler has instructed employees to start working on one.

One of the biggest opponents of a potential policy change has been Doug Sifu, chief executive of Virtu Financial Inc., a high-speed trading firm and market maker. Payment for order flow is central to Virtue’s business, as well as some brokerages such as Robinhood Markets Inc., who use the revenue to replace once-ubiquitous trading commissions.

Firms like Virtu profit from the difference between the buy and sell prices of the shares being traded. They say that they trade at a slightly better price than the stock exchanges. This, with many retail brokerages moving to zero-commission trading, saves investors money, the companies say.

Mr. Sifu took a train from New York to Washington last month for a security traders’ conference. At the downtown hotel, he gave a presentation entitled “Myth Busting”, in which he sought to refute some of the SEC’s concerns about payment for order flow.

Mr. Sifu said in an interview, “The narrative was so contrasting and polluted with politics…that I felt there would be no fair trial in the world of public opinion.” “I felt like they misrepresented—not intentionally—but they misrepresented the facts in the marketplace.”

Mr Sifu has spoken to all five SEC commissioners, including Mr Gensler, to defend the payment for the order flow. He has also sought to persuade the nearly two dozen lawmakers who oversee the SEC that the practice is good for investors.

The chairman of the SEC has suggested that when brokerages send investor orders to private trading firms rather than exchanges, it undermines the quality of prices displayed to the public and reduces competition. He often notes that the largest firm that pays brokerage for orders, Citadel Securities, states that it accounts for half of retail trade volume.

“I think companies and investors alike benefit if we can increase competition, lower costs, and bring more transactions out of the dark,” Gensler told Senate Banking in a September hearing. Told the committee. The SEC declined to comment on Mr. Sifu’s statements.

Sifu, a longtime Democrat, attended a fundraiser this year for Senate Majority Leader Chuck Schumer (D., NY). The executive believes he may be a more effective lawyer in Democrat-controlled Washington than Citadel Securities founder Ken Griffin, even though Virtuo is smaller. Mr Schumer’s office did not respond to a request for comment.

Griffin, one of the biggest donors to the Republican campaigns, has kept a comparatively low public profile, but he also met Gensler in June as a 20-page paper with recommendations for improving the condition of the Citadel Securities stock market. The lobbying document was circulating. Plumbing.

According to the Federal Election Commission, Mr. Griffin has earned $3.1 million in campaign donations to conservative groups and Republican candidates ahead of the 2022 midterm election. Similarly, before the mid-2018 period, Mr. Griffin had donated around $1.7 million.

Retail brokerages that sell their clients’ orders to market makers have also sought to defend that model, which generates billions of dollars in revenue. Robinhood, the upstart brokerage, has spent $2.1 million in House and Senate lobbying so far this year, up from $275,000 in 2020, according to Congressional lobbying disclosures.

Its chief legal officer, former Republican SEC Commissioner Daniel Gallagher, said the SEC’s initiative amounted to a “nanny state” that tells customers on Robinhood’s app, “You’re too stupid to be in these markets.”

Charles Schwab, one of the largest retail brokers, is circulating a policy document anticipating existing stock-market regulations, allowing brokers to route customer orders to high-frequency traders, thereby reducing the risk of overeating in a decade. Individual investors would save $120 billion.

“We have to be really careful not to destroy the good in the search for the right one,” Walter Bettinger, CEO of Charles Schwab, told an industry conference on November 2. Individual investors have never enjoyed lower costs or better access.

Pay order flow accounted for 72% of Robinhood’s revenue last year, according to the company. Schwab’s order-flow revenue increased to $621 million in 2020, up from $135 million in 2019.

Critics of pay for order flow point out that the benchmarks used by brokers to estimate savings are flawed because they are measured from public exchange prices. Critics point out that when trading activity is diverted to firms such as Citadel Securities and Virtu, there is less activity on the exchanges, making prices less accurate.

Jim Himes (D, Conn.), a former Goldman Sachs banker, said, “Yes, when a broker uses pay for order flow, you see a price correction, but you’re actually getting a lower price. Let’s see the price correction. hearing last month

Previous efforts by the SEC to change the rules for companies that execute stock trades have sparked bitter legal battles, which the agency has sometimes lost. Mr Gallagher told Barron in September that Robinhood would “seriously consider” suing the SEC to prevent him from banning payments for order flow.

Republican lawmakers have been receptive to industry appeals. Pat Tommy (R., Pa.), the top Republican on the Senate Banking Committee, introduced a bill last month to block the SEC from ending the practice.

“New innovations – such as zero commission trading and user-friendly mobile apps – have allowed more Americans to participate in the stock market than ever before,” Tommy said in a statement. “Such technologies are made possible partly by payment for order flow.”

This story has been published without modification to the text from a wire agency feed