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Gensler pledges market structure review after GameStop turmoil

Joe Biden’s nominee to lead the US stock market regulator has promised a review of fees paid by large Wall Street firms to retail brokerages in the wake of chaotic trading in companies such as GameStop.

Gary Gensler said on Tuesday that if confirmed as head of the Securities and Exchange Commission he would want to look into payment for order flow, in which retail brokerages receive fees from market makers to handle their trades.

The practice has been lucrative for brokerages such as Robinhood, many of which do not charge commission for their trades. But it has come under political scrutiny after many small investors betting against large hedge funds were surprised to find that their brokerages were also collecting money from market-making firms such as Citadel Securities.

Speaking to the Senate banking committee during his confirmation hearing, Gensler said he wanted to undertake a review into these fees.

He said: “I think that we will, with the excellent staff, look at market structure in the equity markets around payment for order flow. Frankly, just a handful of financial firms are buying most of the retail flow in America.”

In return for payments for order flow, market makers such as Citadel Securities, Virtu Financial and Susquehanna agree to complete a trade in shares or options at or better than current market prices. Wall Street trading firms paid almost $3bn to retail brokers for order flow last year.

Mark Warner, a Democratic member of the committee, likened Robinhood’s business model to that of Facebook, which similarly does not charge users but makes money in part by selling access to them to advertisers.

Warner said: “I sometimes think Robinhood structure is somewhat similar to the Facebook structure. I’m not sure if you’re a customer of Robinhood whether you are really a customer or a product.”

Gensler agreed the market power of popular online brokerages raised questions for regulators, saying: “What if a company, through the natural economics of network economics, collects and concentrates and dominates a field? . . . What does that do to the pricing of capital in this country?”

The SEC is already investigating what happened earlier this year when users of Reddit chat rooms drove shares in GameStop and other companies dramatically higher.

In the middle of the frenzy, several online brokerages including Robinhood restricted trading in the stocks, sparking anger from investors and scrutiny from politicians.

Gensler said the GameStop frenzy had thrown up several difficult regulatory questions, including how to protect investors when trading apps are designed to encourage heavy trading.

“The story is about this new technology and technology changing constantly,” he said.


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