Shares of market maker Virtu Financial surged Thursday following a report from Bloomberg that the U.S. Securities and Exchange Commission will refrain from banning payment for order flow.
The report said that new rule proposals, aimed at creating more competition and price transparency for retail traders in the stock market, would fall short of banning the practice whereby market makers pay stock brokers for the privilege of executing trades.
Virtu Financial Inc.
stock rose more than 8% Thursday. Shares of online broker Robinhood Financial Inc.
initially surged in morning trade before shedding those gains to be down nearly 2%, underperforming the S&P 500 index.
Robinhood pioneered the now widespread model of brokers offering commission-free trades and relying instead on payment for order flow as a primary revenue source.
Market makers like Citadel Securities, Virtu and Two Sigma now execute more than 90% of retail trades, SEC Chairman Gary Gensler said in a June speech.
In testimony to Congress last week Gensler said that he “believes that it’s appropriate to look at ways to freshen up the SEC’s rules to make our equity markets as fair, efficient, and competitive as possible for investors, particularly for retail investors,” an SEC spokesperson told MarketWatch.
“Staff is considering possible recommendations related to best execution; disclosure of order execution quality; the National Best Bid and Offer; minimum price increments (“tick size”); exchange access fees and rebates; payment for order flow; and order-by-order competition,” the spokesperson added.
Market makers, who make a small profit on the spread between the price at which they’ll buy and sell a security, are keen to maintain the current market structure. These companies pay for retail order flow because it is typically uncorrelated with the broader market and therefore less risky.
While some argue that payment for order flow has enabled brokers to offer no-commission trades, Gensler has argued that money saved on commissions can sometimes be reduced through suboptimal pricing.