Benzinga - by AJ Fabino, Benzinga Staff Writer.
Discussing the pressing concerns about the current stock market structure and the urgent need for its reform were Urvin Finance CEO Dave Lauer and Benzinga "Premarket Prep" host Dennis Dick on the show Thursday.
Lauer has spent 15 years in the industry and is an advocate for important market structure reforms with a focus on making markets more transparent, aiming to operate within investors’ best interests.
What Happened: Retail investors know Robinhood Markets Inc (NASDAQ: HOOD), SoFi Technologies Inc (NASDAQ: SOFI), E-Trade and many more trading platforms offer commission-free trading. People place an order through the mobile app or on a desktop and aren't charged when the order is filled.
Lauer said that’s pretty deceptive.
While traders may not see upfront costs, they're paying in the form of poor execution quality, as the bulk of orders from retail brokers bypass stock exchanges and land with just three different firms. Lauer argued that this type of process eliminates the competitive spirit of the market, resulting in inferior prices for the average retail trader and widening market spreads.
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Counterarguments often tout the "tight spreads" seen today as evidence of market efficiency, though Lauer argued that while spreads may be tighter than 15 to 20 years ago, they still have the potential to be 30% tighter still.
“We should not strive for markets that are good enough, we should not accept execution quality that is good enough,” Lauer told Benzinga.
Dick highlighted the controversial and tandem issue of Payment For Order Flow (PFOF). Lauer pointed out the pitfalls of the current PFOF structure (Robinhood uses this), which was popularized by Bernie Madoff.
“Maybe we should be questioning anything that he did and rolling anything that he did back,” Lauer said.
Path To Reform: Lauer applauded the SEC's current initiatives to enhance market transparency and reassess tick sizes. To tackle PFOF, he recommended eliminating rebates and letting fees compete down to minimal levels on the exchange.
Two further SEC proposals, the order competition rule and regulated best execution, aim to refine the standards of trading for better market quality.
The Urvin Finance CEO said he is hopeful the SEC would make decisive changes in the market's structure in the coming months. While some rules might see the light of day this year, other critical reforms might have to wait until 2024.
Photo: Pixabay
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