In an interview with Barron's, SEC Chair Gary Gensler raised the possibility of an SEC ban on payment for order flow, arguing that it has "an inherent conflict of interest." He also stated that the agency is considering ways to improve market transparency.
Mr. Gensler contended that payment for order flow - which is the practice of a broker being compensated by a market maker for directing a trade order to the market maker for execution - means that market makers not only receive a spread on each trade, but also (i) data on the trade, and (ii) a first glance at the trade. Mr. Gensler emphasized that this enables market makers to "match off buyers and sellers out of the order flow." Mr. Gensler pointed to the United Kingdom, Australia and Canada as examples of countries that have banned payment for order flow, and stated that a similar U.S. ban is "on the table."
Mr. Gensler noted that the SEC is also considering actions to enhance market transparency, and highlighted the substantial portion of trading that exists in dark pools or that is internal to companies that "keep those trades off exchanges." Mr. Gensler stated that "[t]ransparency benefits competition, and efficiency of markets," as well as investors. He also asserted that opaque markets (i) give market makers the opportunity to receive more compensation, which ultimately reduces investor returns, and (ii) negatively affect firms that are raising money.
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