Sunlight on the trading floors

Proposed rules affecting how stocks are bought and sold offer an opportunity to strengthen the public’s trust through increased transparency.

Traders work on the floor of the New York Stock Exchange in New York City, U.S., Dec. 7, 2022.

Over the last couple of years, the public’s trust in stock markets has been strained repeatedly – by the pandemic, the meteoric rise and fall of so-called meme stocks, and lately the stunning collapse of FTX, the world’s third-largest cryptocurrency exchange.

Yesterday the federal agency that monitors U.S. stock markets took a step meant to shore up that lost confidence. It endorsed the broadest set of new rules in nearly two decades to improve competition and deliver better prices to small investors. “The markets have become increasingly hidden from view, especially for individual investors,” said Gary Gensler, chair of the Securities and Exchange Commission.

The proposed reforms cap a year of global efforts to bring greater transparency to trading, ranging from equities to carbon credits. They draw attention to some of the more opaque workings of the modern stock market. As a measure of their complexity, they run to 1,500 pages, and their economic benefit to individual investors is minimal. The commission estimates that the new rules could net small investors an additional $1.5 billion annually, or merely $1.08 per $100 traded.

But as a means of bolstering trust, they may pay important dividends. They are designed to address ways that modern trading practices have been reshaped by high-volume, computer-driven investment strategies that the commission says put small investors at an unknowing disadvantage.

One rule would require brokers to buy and sell stocks on behalf of small investors through a new auction mechanism. This would allow more traders an opportunity to bid for them, ensuring individual investors a better shot at more advantageous prices – higher for sellers, lower for buyers. Another reform would require investment firms and exchanges to publish monthly data on the stock prices they provide investors. The new rules also seek to decrease the potential for company executives to fall afoul of insider trading restrictions.

The commission drafted the proposals partly in response to the advent of meme stocks like GameStop, which in 2021 gained rapid artificial value through viral popularity on social media and just as quickly collapsed. Large-volume wholesale broker-dealers like Charles Schwab worry the new rules may infringe on free competition. Bourses like the New York Stock Exchange and IEX see the opposite.

By their nature, regulations offer a measure of the public mood. As a Harvard study found more than a decade ago, “distrust influences not just regulation itself, but also the demand for regulation.” The commission’s proposals are now open to a period of public debate through March of next year. Inviting scrutiny of trading practices that affect a majority of investors is itself a public good, reflecting how democratic societies build real value through trust.

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