The Securities and Exchange Commission (SEC) has been reviewing the ways that brokers trading every day. Investors are worried that the way millions of everyday global investors buy and sell stocks is going to change. And this change will be bad news for so-called free-trading apps like Robinhood as well as other similar business models.
When an investor buy or sell stocks on an app, the trade seems to be instantaneous. But, this buy-sell action is a complex process of Wall Street players exploiting tiny differences in prices to rake in huge amounts of cash.
Here is now it works:
When you place a buy or sell order, your broker for example Robinhood takes your order to a firm known as a wholesaler or market makers – the middlemen who are supposed to get you the best prices and who pay the brokers for the privilege of executing the trades. They typically make pennies off each transaction.
And the process above is called “payment for order flow”. Now this process has come under scrutiny by regulators due to the fallout from the January 2021 run-up stocks like GameStop.
The SEC are likely to roll our new rules as early as this Wednesday. One proposed new rule will be added more competition at the middleman level to ensure retail investors are really getting the best prices. It may also mean trading orders will be routed into auctions where trading firms would have to compete to execute them. In the future, investors may need to pay more trading fees on so-called free-trading apps.
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