> Requiring such auctions would be a big change. The SEC says brokers send more than 90% of marketable orders to wholesalers. Unlike exchanges, which display price quotes publicly and allow a variety of market players to attempt to fill orders, wholesalers trade directly against the incoming retail flow, an arrangement that effectively prevents other market players such as institutional investors from interacting with individual investors’ orders.
Levine points out that it's not clear that the change --- brief order-by-order auctions to beat the wholesaler price (which is in turn at least as good as the public market) --- will actually improve outcomes for retail investors; there's a paper:
If we look at the actual price improvement that retail order flow gets, I think we can be pretty confident that Robinhood and IBKR Pro users, who have the least price improvement today (one group because of greedy brokers and the other because they are usually professionals doing their personal trading), will do better. Users of Schwab and TD Ameritrade, who get the best price improvement, will probably do worse.
Whether the total amount of price improvement in the market increases still does seem to be up for debate - I personally doubt that it will be much better for average retail investors than the old system.
It really depends on whether non wholesale players step up and participate in these auctions.
While Citadel and Virtu are very large market makers, there are other equally large firms that don't jump through all the hoops to participate in wholesale, but would probably do on-exchange auctions.
The SEC also talks about non market makers using this for execution, but I don't think that's going to happen immediately...
This does not address the inherent conflict/manipulation possible with the HFT relationship:
1.Imagine a Robinhood user places an order to sell 100 $GME
2.Robinhood doesn't send it to an exchange first, it holds onto it for a few milliseconds.
3.Meanwhile, Citadel/Virtu or others execute orders below what the bid would have fetched a few milliseconds ago.
4.Now, the order is routed to the exchange above what the market was trading at and thus certainly goes unfilled.
5.300 milliseconds per the regulation elapses and the order comes back to the HFT firm to fill.
The bigger issue here is the nepotism in providing wholesale prices to HFT firms. The stock exchanges do this and so does Robinhood. In an open and competitive market, the playing ground should be regulated to be equal for all.
Or infact, as motorsports participants know very well, the cost of access to markets should INCREASE with size, not decrease. . . If you're the present Formula1 team winner, you pay SIGNIFICANTLY more to enter next years championship than the last place team.
Sounds like a sensible change to me.