Practice of funneling small investors’s stock orders to high-speed trading firms draws regulator’s scrutiny
WASHINGTON—The Securities and Exchange Commission’s acting chairwoman signaled support for a wholesale review of a practice that funnels many small investors’ stock orders to be filled by high-speed trading firms.
The system, known as payment for order flow, is decades old but has generated greater scrutiny as more individual investors trade on brokerage apps operated by companies such as Robinhood Markets Inc. Online brokers like Robinhood make money by selling customers’ orders to firms such as Citadel Securities and Susquehanna International Group LLP, which trade with them.
In a letter made public Tuesday, SEC Acting Chairwoman Allison Herren Lee said regulators should examine such arrangements to make sure practices are fully disclosed and “consistent with best execution obligations.” That requirement considers whether customers get a better price than what is currently quoted in the market, the speed of execution and the probability their order will be filled.
Ms. Lee’s letter, which was sent in response to questions from Sen. Elizabeth Warren (D., Mass.), didn’t say how or when the SEC might start a review of payment for order flow. An agency spokeswoman didn’t immediately return a message seeking comment.
Ms. Warren sent questions to the SEC in January after frenetic trading in shares of GameStop Corp. and other so-called meme stocks created such volatility that some brokers had to curb tradingto meet margin calls from their clearinghouses.
