Written by Forrest Crist-Ruiz
Tuesday, the chairman of the Securities and Exchange Commission Gary Gensler faced pushed back from senators about his recent ideas of adding cryptocurrency regulation along with other topics such as meme stocks and zero trading commissions.
Specifically diving into zero-commission trading, Gensler believes that zero fees while nice for the retail investor also hurt the traders who use them as their transaction data is being sold to market makers/companies who match buy and sell orders.
In theory, these market makers can front-run orders for very small profits. These profits can add up quickly partly from the vast amount of retail traders and high-frequency trading.
On the other side, an argument can be made that people have the right to choose between zero commissions and paying a small premium to hide their order flow.
Pat Toomey, Senator of Pennsylvania questioned Gensler on the need to restrict access to order flow since buy and sell orders are closely matched showing that the market is providing a highly efficient place to execute trades for both retail and institutional investors.
While both sides have valid points, the market can easily exist with both trading fee structures.
What continues to lack is a clear upfront policy from companies showing how their customer’s data is used or profited from.
With that said, Gensler’s approach could add more regulation to what market makers can buy in the form of data.
This might not be the right approach as it further complicates the matter and could take away free trading.
Furthermore, though retail traders would rather not have their order flow tracked, many traders prefer the zero-fee option compared to paying a small price.
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