SEC to Push Bond and Option Brokers for Better Prices on Trades

(Bloomberg) — The US Securities and Exchange Commission’s draft plans to overhaul rules for the stock market would also expand its oversight of bond and options trading.

A proposal being circulated inside Wall Street’s main regulator would require that brokers in fixed-income and some derivatives — as well as those handling equities — get their clients the best deal, according to people familiar with the matter. Brokerages already face a similar “best execution” rule from the industry-backed Financial Industry Regulatory Authority, but a regulation directly from the SEC could lead to tougher enforcement. 

The SEC and Finra declined to comment. 

Gary Gensler, chairman of the U.S. Securities and Exchange Commission (SEC), speaks during a House Appropriation Subcommittee hearing in Washington, D.C., US, on Wednesday, May 18, 2022. The hearing is titled “Fiscal Year 2023 Budget Request for the Federal Trade Commission and the Securities and Exchange Commission.”

For more than a year, SEC Chair Gary Gensler has been floating ways the regulator may overhaul trading rules for stock transactions. He’s derided behind-the-scenes aspects of a market that he says is too opaque and littered with conflicts of interest.

The agency’s efforts have led to intense industry lobbying, as well as speculation over the contours of the yet-to-be-released proposal. 

Read More: SEC Set to Let Wall Street Keep Payment-for-Order-Flow Deals

The SEC may unveil the plan at a public meeting next month, the people said, asking not to be named discussing internal deliberations. Officials may try to advance the measures in five pieces, some of the people said.

Once the regulator’s commissioners propose a rule they must take into account public feedback and then again vote months later for it to become final. That gives industry members an opportunity to weigh in.

Whatever is enacted, it’s almost sure to mark the biggest overhaul for the US stock market in more than 15 years, and the agency’s most-direct response yet to last year’s wild trading in GameStop Corp. and other meme stocks. 

Beyond best execution, many of the changes for the stock market that are under consideration track with broad strokes that Gensler laid out in a speech on equity-market structure in June, said the people.

Read More: SEC Chief Takes Aim at Payment-for-Order Flow in Overhaul

For example, the SEC is likely to propose an order-by-order auction mechanism intended to help retail traders obtain the best pricing, said the people. The plan may call for stock exchanges to meet certain volume thresholds to participate in auctions for orders, said some of the people.

The regulator is also weighing a plan to force brokers to disclose more about how much trading with them costs compared with benchmarks, a metric known as price improvement, said the people. 

In June, Gensler signaled that a sweeping best-execution rule could be in the offing. 

“I think investors might benefit if the SEC considered proposing its own best execution rule,” he said. “I’ve asked staff to consider recommending that the SEC propose its own best execution rule — for equities and other securities,” he said at the time. 

No final decision on the scope of the overhaul has been made.

Meanwhile, the SEC will stop short of banning payment for order flow, a controversial way to process retail stock trades, Bloomberg News has reported. Gensler had floated the potential for such a move previously.