The federal Securities and Exchange Commission (SEC) is investigating how retail broker apps encourage stock trading and earn money when those trades are executed.
SEC Chairman Gary Gensler said these companies are engaged in “a little bit of a conflict of interest,” CNBC reported Friday (May 7).
“An app that says they have zero commissions is earning revenue on your trading through something called ‘payment for order flow,’” he said on the network’s “Squawk Box” show. “Someone is paying them for that order flow and paying them for that data.”
Gensler says the root of the issue is the gamification at work in the apps, such as “props, leaderboards, behavioral ways to get individuals to trade more,” along with how the apps market their platforms.
Gensler declined to comment on what should be done to change or regulate gamification and payment until the SEC receives public comment on the matter, but did note that “disclosure alone” may not be enough.
The chairman’s interview followed his testimony Thursday before the House Financial Services Committee for a hearing scheduled earlier this year in response to incidents in January in which “meme stocks” like GameStop and AMC were inflated in value well beyond the losing bets hedge funds had placed on them, causing damage to those funds.
Gensler has also signaled the SEC wants to look at regulatory changes in response to the March blow-up of Archegos Capital Management, which led to more than $10 billion in losses for some of the world’s leading banks.
Overall, the SEC will examine whether larger broker-dealers known as wholesalers have too much influence in handling retail orders. Under the payment for order flow system, wholesalers pay the retail brokerage firms, such as TD Ameritrade and Robinhood, for the right to trade with those customers’ orders.
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