Proposed changes to the way the US stock exchanges handle retail orders have been set out to halt some of the frenzied trading seen last year in meme stocks.
SEC chairman Gary Gensler will outline the proposals tomorrow, according to the Wall Street Journal.
Payments for order flow (PFOF), a major source of income for companies such as Robinhood Markets Inc (NASDAQ:HOOD), won’t be banned outright.
A requirement for best execution however will be inserted and that would make it harder for a broker to justify taking payments, suggested US bank Jefferies.
Firms will compete to fulfil orders with the change likely to mean greater transparency and an end to the bulk trades that were a feature of the meme stock boom last year.
Options considered by the SEC included to quote trades in increments of less than a cent and also to reduce the maximum fee exchanges can change brokers to access their quotes, but it has decided on the auction route according to the reports.
The changes come amid reports that hedge funds are again stacking up their bets against last year’s meme stocks such as video retailer GameStop and cinema owner AMC Entertainment, confident that retail investors have lost their appetite for equities.
Hedge funds racked up huge losses last year as retail investors ganged together on websites such as wallstreetbets on the Reddit platform to send the prices of meme stocks soaring and forcing shorters rapidly to close positions at any price.
But the worm might be turning full circle, with Reuters reporting that short interest as a percentage of the company's float stood at 24% for GameStop and 22% for AMC, near their highest levels in a year.
"Retail investors are at a point now where they are just sitting on the sidelines and they’ve lost money in many cases," said Randy Frederick, managing director of trading and derivatives at the Schwab Center for Financial Research, told the newswire.
Last week, Goldman Sachs also reported that retail investors had sold most of their US equity purchases from the last two years,
GameStop shares are down 63% from the record closing high of $347.51 reached in January 2021, while AMC is 81% off its record of $62.55 seen in June 2021.
AMC recently saw a bounce as Tom Cruise's new blockbuster "Top Gun: Maverick" smashed box office records in its opening weekend, leading analysts to predict the film might pull in $1bn in ticket sales this year and spark a cinema revival.
Changes to the PFOF rules might help some companies though.
Jeffries said an auction process would be good news for the UK's IG Group Holdings Plc (LSE:IGG), where the broker estimates PFOF trades will account for 7% revenue and 7-15% of operating profit (via its US partner tastytrade) in 2023, depending on drop through.
"Tastytrade is strongly geared into rising rates which are not reflected in consensus forecasts or guidance and can provide offset for IGG in a bear case scenario," said the broker.
IG shares dipped 0.7% today to 716.5p.