The Securities and Exchange Commission (SEC) rules would address payment-for-order-flow and best execution among other issues, he told a virtual conference on financial technology and global markets at Piper Sandler on Wednesday.
The aim was to make markets as efficient as possible, Gensler said.
Payment-for-order flow, whereby wholesale market makers pay broker-dealers to send them client orders which they execute on their own trading platform or a third-party platform, raises a number of conflict-of-interest questions, he said.
The practice has drawn scrutiny from regulators globally. Critics say it creates an incentive for brokers to send orders to whichever market-maker pays them the highest fees, rather than the venue that might get the best outcome for customers.
Market-makers say the business model has increased liquidity and reduced costs for average investors.
“Are customers getting best execution in the context of that conflict? Are broker-dealers incentivized to encourage customers to trade more frequently than is in those customers’ best interest?” Gensler asked during his speech.
The SEC review follows January’s Reddit rally – fueled by retail investors coordinating on Reddit and trading through low-cost brokerages – drove up GameStop and other shares.
Amid the intense volatility, many brokers restricted trading in the affected stocks, which shone a spotlight on their business models and raised questions over whether they had prioritized their market-making clients over their everyday retail clients.
It also highlighted the small number of market-makers that dominate the retail market, with Citadel Securities executing roughly 47% of all U.S.-listed retail volume, according to its own data. That could pose competition issues, said Gensler.
“As a significant and growing share of retail orders are routed to a small, concentrated group of wholesalers, certain market makers have more data than others.”
