- Brett Redfearn, the director of the Securities and Exchange Commission's trading and markets division, addressed the recent flurry of discount brokerage moves to eliminate online trading commissions.
- "It is always good to see competition bringing down prices for investors," Redfearn said on Thursday at an industry conference in Washington.
- The comments from Redfearn - previously the global head of market structure for the corporate and investment bank at JPMorgan - come as rivals Charles Schwab, TD Ameritrade, E-Trade, and Interactive Brokers have all made similar announcements in recent days.
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WASHINGTON, DC - The Securities and Exchange Commission's top markets and trading official sees the onslaught of zero-fee announcements out of discount brokerages over the last week as a good thing - but also a reminder that brokers need to be clear about disclosing other types of costs.
"It is always good to see competition bringing down prices for investors," Brett Redfearn, the SEC's director of the division of trading and markets, said at an industry conference here on Thursday.
Redfearn's comments come after Interactive Brokers, Charles Schwab, TD Ameritrade, and E-Trade have made similar decisions in recent days to eliminate the cost of trading US-listed stocks, exchange-traded funds, and options in a bid to take on new digital entrants like the trading app Robinhood - and appeal to younger investors.
These moves are a sign of the times. Across the online trading and wealth management landscape, services from the cost of trading stocks and investing to finding financial advice are quickly falling as competition ramps up.
Execution quality - which encompasses how quickly a trade gets done and price moves that hurt or help the customer in the meantime - is one looming question many in the industry have following brokerages' decision to cut fees. And the business of selling clients' buy-and-sell orders directly to high-speed market makers, as opposed to going direct to exchanges or trading venues, has come into the spotlight as commissions race to zero.
"Best execution doesn't change," Redfearn said. "The best execution is best execution. Regardless, there still is a best execution obligation to customer order. That doesn't change."
Brokerages such as Charles Schwab, TD Ameritrade and E-Trade already receive payment for their order flow. However, with the loss of revenue previously derived from commissions, some have questioned if brokerages will look to be more aggressive in selling their clients orders, and the impact that will have on the price customers will be able to execute trades on.
A shifting regulatory landscape
Redfearn points to regulatory requirements already in place that stipulate brokerages must disclose any payments received from order flow directed to market makers.
"These conversations need to be explicit," he said. "These disclosures need to be out there."
Redfearn also pointed to a piece of US regulation called Rule 606, which was amended about a year ago and requires broker-dealers to "provide enhanced disclosure of information regarding the handling of their customers' orders." The rule was tweaked to require further transparency from the broker-dealers.
But some market participants believe the long-term impacts on market structure are unclear. Some worry that if retail order flow is directed only to market makers and not the wider investing community, price discovery - the process of determining the proper price of a security - might eventually be impacted.
Redfearn is no stranger to the relationship between the investment community and regulators; he once worked in the industry that he now regulates.
Prior to joining the SEC in 2017, Redfearn was the global head of market structure for the corporate and investment bank at JPMorgan.
The online brokerages' moves have analysts speculating about what's next for the industry at large.
Credit impact
Fitch, the ratings agency, said on Wednesday after E-Trade's announcement that it viewed the many moves to zero commissions as a "credit negative" for the US retail brokerage industry, and that it sees the majority of other brokers expected to follow suit with near-term cuts.
That will pressure brokers, Fitch said, making net interest income from cash sweeps, as well as revenues wealth management and investment management more important. Those factors could drive further consolidation, it said.
Fitch noted Interactive Brokers' move last week was the "latest salvo" in the space that's included Robinhood, SoFi Invest and Square, as well as the zero-commission offerings of MerrillEdge and JPMorgan Chase's You Invest.
One-year-old You Invest has now gone live with options trading for at least some customers and is also planning on lowering the minimum investment size for its automated portfolios later this year, Business Insider reported earlier this month.
Others say consolidation may be coming, and it's only a matter of time before other fees fall across the board, all of which stands to benefit retail customers from stock trading to cash management.
"Just another example of the blurring of banks and brokerages," said James Angel, an associate professor of finance at Georgetown University who specializes in market structure. "Retail has never had it better."
