FLASH FRIDAY is a weekly content series looking at the past, present and future of capital markets trading and technology. FLASH FRIDAY is sponsored by Instinet, a Nomura company.
The growing influence of retail investors has forced regulators to increase their attention and focus on broker-dealers. In addition, the rising levels of retail trading activity have put pressure on the trading infrastructure of retail investing platforms.
Historically, a loss of revenue in trading commissions was partially offset by the industry practice of payment for order flow (PFOF), according to a report from Deloitte titled “The rise of newly empowered retail investors”.
However, many reputable sources say they are a net positive for investors, since market makers can access better prices than what are typically available on public exchanges, thus lowering execution costs.
John Bartleman, President and CEO of TradeStation, said the SEC sees potential changes to payment for order flow: “The regulators have made it a point that they feel like payments for order flow is not a good thing for retail traders.”
“I think those of us in the market feel like it actually is a good thing for the customers that has allowed us to reduce costs significantly and improve price improvement and execution quality for clients,” he added.
Other potential issues that regulators are focused on include consumer protection and questions regarding the need for more disclosure on customer gains and losses. Regulators are also checking to ensure that brokers are fulfilling Know Your Customer (KYC) requirements and onboarding obligations when accommodating the massive influx of accounts opened on electronic devices, according to Deloitte.
On the technology side, the SEC is proposing new rules on predictive data analytics, Bartleman said.
“I think it’s their way to try to get some controls around what’s happening with AI,” he said.
“They’re afraid of retail investors being negatively impacted by the advice that could come out of AI and they want to make sure that broker-dealers and advisors are using this appropriately,” he explained.
He thinks this will take some time to evolve, adding that some players in the space have started to innovate with financial data being fed and trained into these AI tools.
On the crypto side, Bartleman mentioned the lack of regulation in the US: “We’re starting to see some good regulation being put in place in the EU and Asian markets, whereas the US really seems to be lagging in the regulatory space, which really hindered the growth of the last couple of years.”
“We would like to see more clarity in the regulatory space. We want to follow the rules, but we want to be able to innovate and compete,” he said.
According to Deloitte, to stay ahead of these transformative forces, brokerages should foster an experience that is “simultaneously tech-forward and human-centric”.
“I think the key thing is customer focus,” commented Bartleman.
“We are really doubling down on understanding our customers, their needs, where they’re growing and how we as a firm can better cater to them,” he said.
“Other brokers need to be listening to their key clients and where they want to grow,” he added.
Bartleman also said that broker-dealers should focus on infrastructure and technology.
“Things are innovating so fast, particularly with AI. It’s hard for any of us individually as firms to keep up, especially at smaller firms,” he said.
“We have to be really selective in what we build out natively for our clients, versus how we can partner. This is where our investment in API technologies has allowed us to reach out to hundreds of third party FinTech platforms, and power those platforms with our brokerage capability and market data so that our customers and their customers can have a more seamless experience and leveraging those innovative technologies that are coming up,” he added.
“I think firms that have that capability will be better off and more successful at designing solutions for their customers,” he concluded.
