The Scuffle Over Your Stock Trades

The SEC’s ideas to change how markets work could shake up the brokerage business

- Katherine Doherty and Lydia Beyoud, with Claire Ballentine

A battle is brewing in Washington and on Wall Street over how stocks get traded. At issue is whether retail investors get the best bang for their buck.

The controversy may be puzzling to anyone outside the industry, given that commissions have fallen to zero on trading apps and discount brokerage services. But US Securities and Exchange Commission Chair Gary Gensler is asking whether those trades come with hidden costs, or if it’s even possible to tell under the current system whether retail investors are getting the best prices when they buy and sell stocks. “The markets have become increasingly hidden from view,” Gensler said in a June speech delivered remotely to an investment banking conference in New York. As he previewed a sweeping proposal for new rules, finance executives in the room sat furiously typing on their phones and shaking their heads, while neglecting their chicken entrees.

The current market plumbing has been around for well over a decade. When you buy shares of a stock over an app, that trade often doesn’t get made at a well-known venue such as the New York Stock Exchange. Instead, the order may go to a high-frequency trading firm, or wholesaler. These companies make money by paying a little less to buy the stock that they sell to you, or by getting a little more when they sell a stock they’ve bought from you. This small “spread” is essentially part of the price you pay for a trade, even when there’s no commission. To get the chance to earn these tiny profits—which add up to serious money in the aggregate—the trading firms pay brokerages to have trades sent their way, a practice called payment for order flow.