Securities Times reporter Xu Ying
A few days ago, the U.S. Securities and Exchange Commission announced a plan to reform U.S. stock trading rules, which aims to promote competition among some commission-free brokers and market makers in processing trading orders to ensure that retail investors get the best trading prices.
This is seen by Wall Street as "the biggest reform of the U.S. stock market in the past 15 years", and a formal proposal will be announced as early as this fall, or it may subvert the "payment for order flow" (PFOF) that zero-commission brokerages such as Robinhood rely on to survive. )business model.
Robinhood shares fell nearly 15% last week, after falling more than 11% the week before.
US stocks to be revised
Market Maker Trading Rules
According to foreign media reports, SEC Chairman Gary Gensler said recently that there is no level playing field between different components of the current market such as wholesalers, dark pools and exchanges, and he has asked staff to monitor the overall situation. Weigh reforms from a cross-market perspective to make the stock market more transparent and fair to retail investors.
The new rules will increase competition for orders between different brokers, including requiring brokers to obtain buy and sell orders from retail investors through auctions.The auction mechanism means that different companies will compete with each other to execute the trades of retail investors, and it will fundamentally change the business model of upstream market makers.At the same time, brokerages and market centers will also be required to disclose more data on the quality of order execution, which will benefit investors.
According to Gensler, he wants to require different market makers to compete directly in executing trades.If the proposed plan is successfully implemented, it means that major brokerages and market makers will compete to execute the trading orders of retail investors, which will substantially change the business model of upstream market makers.
Currently, a retail brokerage firm can send client orders directly to a wholesale brokerage firm for execution, as long as the brokerage firm can match or beat the best prices on U.S. exchanges.Large market makers typically add a penny to the best price.But this model limits competition for retail orders.
It is reported that the SEC will announce a formal proposal for the reform this fall, and then solicit public comments, and finally the SEC will vote on whether to adopt it.The plans, if implemented, would be the biggest overhaul of the U.S. stock market in 15 years.
According to foreign media reports, once the new rules are implemented, it will affect the way “zero-commission” online brokerages such as Robinhood, Charles Schwab, and Morgan Stanley’s E*trade process retail trading orders; Market makers like Virtu Financial, which handles more than 70% of retail stock orders across the market, will also be affected.
"Zero commission" model
Where to go?
Brokerage brokerage commission price wars have always attracted much attention.In China, the promotion of so-called "zero commissions" has been a red line of regulation.Zhongshan Securities launched the "Zero Commission" in 2014, but it was urgently stopped by the regulatory authorities less than 48 hours after its high-profile debut.It is reported that this "zero commission pass" is not completely free, but still needs to pay exchange fees, transfer fees and other fees. The zero commission referred to by Zhongshan Securities only means that it does not charge transaction fees.
In the "Administrative Measures for Securities Brokerage Business" issued by the China Securities Regulatory Commission in 2019, it is stipulated in the draft that securities companies shall not charge investors for securities trading commissions significantly lower than the cost of securities brokerage business services, and shall not use "zero commission", Words such as "free" for false advertising.The reporter learned from the industry that although the phenomenon of low commissions still exists in recent years, the average commission rate of securities transactions has continued to decline, but according to the official statement of most securities companies, 2.5 million yuan is still the current bottom line of commissions for account opening transactions.
In the United States, especially since 2020, zero-commission brokerages represented by Robinhood, the "retail base camp", have been in the limelight in the U.S. stock market.Behind the scenes, the PFOF model is the core of this type of brokerage zero-commission model.
It is reported that the PFOF model has a history of about 10 years and has caused more and more controversy in recent years. Many critics believe that this approach is detrimental to the interests of investors.In September last year, Gensler also told the media that the SEC was considering a blanket ban on the PFOF model because the practice created an "inherent conflict of interest."
In fact, the so-called "zero commission" is to generate income through other back-end modules, including order flow income, stock loans, interest on account cash balances, etc., or to be charged to market makers or exchanges through the market maker system commission.Take Robinhood, an online brokerage, for example. Although trading is free for users, Robinhood earns revenue through the PFOF model.Under this model, brokerages outsource retail orders to market makers such as Virtu Financial and Citadel Securities, who, after paying expensive commissions, use information on retail investors' bid-ask spreads for profit.
The non-bank team of Zhongtai Securities once stated in the research report that the controversy of the PFOF model is that it does not provide the best quotation to customers, that is to say, there are additional costs implied in the transaction price of customers, and the transaction is not really free.Due to the simultaneous bidding of US stocks on multiple platforms, there will be price differences and delays. If investors only consider commission costs when choosing platforms, they will ignore the execution and improvement of prices.
According to media reports, for most brokers, the PFOF model is a relatively small part of their business model, usually less than 10% of revenue.But for Robinhood, which pioneered the zero-commission model, order-flow payments have become the biggest source of revenue.The reporter noticed that trading revenue accounted for 80% of Robinhood's revenue at one point. Since Robinhood charges customers zero commission, the main contribution of trading revenue officially comes from PFOF.
It is worth mentioning that the SEC imposed a $65 million penalty on Robinhood in December 2020 for concealing from customers the fact that order flow rebates from high-frequency market makers were the company’s main source of profit. The official website channel misleadingly claims that the quality of its own company's transactions is superior to that of its competitors.According to an SEC investigation, Robinhood cost customers a combined $34.1 million from 2015 to 2018 due to lower execution quality, even taking into account the commission-free factor.
Some analysts believe that if the SEC bans the PFOF model, the value of the Internet celebrity brokerage Robinhood will be equal to zero.
