Huge changes are coming to the way the stock market works CNN Business

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Wall Street’s top policeman has voted for major changes to the way millions of investors buy and sell stocks.

The Securities and Exchange Commission on Wednesday proposed a rule it says would add competition to an invisible — but potentially costly — part of the stock trading system for retail investors. The changes won’t be implemented yet – a spring vote may finalize the rules. But Democrats control the agency by a majority, and the proposal is expected to be approved next year.

Today, when you buy or sell a stock on an app, the trading seems to be instant. But beneath this simple buying and selling action lies an intricate web of Wall Street players who exploit small differences in price to make huge amounts of cash.

When you click buy or sell, the broker, such as Robinhood or E*Trade, takes your order to a company known as a wholesaler or market maker – broker companies that are supposed to get you the best price. Wholesalers pay middlemen for the privilege of executing deals.

This process is known as “push to order flow”. To support free trading, brokers typically pocket wholesalers pennies on every transaction — but those pennies add up, accounting for the bulk of brokerage firms’ revenue. The SEC said the six largest wholesalers collectively paid retail brokers $235 million in an order-flow payment for stock orders in the first quarter of 2022.

Payment order streams have come under intense scrutiny from regulators in the wake of the January 2021 fallout in meme stocks like GameStop. The SEC notes that wholesalers typically execute trades “without providing any opportunity for other market participants to compete to provide a better rate.”

The SEC’s proposed changes would add more competition at the broker level to ensure retail investors actually get the best rates. The orders will be forwarded to auctions where commercial firms will have to compete to fulfill them.

SEC Chairman Gary Gensler has been a longtime critic of the way the current push to order flow market works, arguing that it lacks transparency and competition to the detriment of investors.

Gensler and other critics of the process say that brokers and market makers have a conflict of interest, and that paying for order flow hurts ordinary investors while accumulating huge wealth for Wall Street firms.

“Today’s markets are not as fair and competitive as they could be for retail investors — every day retail investors,” Gensler said. “This is partly because there is a lack of a level playing field between the different parts of the market: the wholesalers, the dark pools, the light exchanges.”

Gensler pointed out that ordinary people do not have the same advantages as larger, wealthier investors who are often able to execute orders at the best possible price.

“The markets are becoming increasingly hidden from view, especially for retail investors,” Gensler said. “Thus, today’s proposal is designed to bring greater market competition to retail market demands.”

— CNN’s Allison Morrow contributed to this report