The U.S. Securities and Exchange Commission is convening a group of financial industry veterans for the first time next month to consider stock market reforms, but one group will be conspicuously absent: retail brokerages.
The SEC's 17-member Market Structure Advisory Committee includes representatives of fund companies, an exchange, off-exchange trading venues, dealers and academia, among others. The group, which meets four times a year, will review old rules, and advise the SEC on a range of new regulations designed to make sure the market is as stable and fair as possible.
Still, given that the SEC has said its main priority is to protect retail investors, the omission of retail brokers raises questions, because without their point of view the panel may recommend changes that favor institutional investors, analysts said. Retail investors place around 16% of all U.S. stock orders.
"There's a missing gap of protecting retail order flow," said Larry Tabb, chief executive of capital markets advisory firm TABB Group.
That gap was also noticed by committee member Joseph Ratterman, chairman of No. 2 U.S. exchange operator BATS Global Markets. He said he mentioned his concern to SEC Chair Mary Jo White shortly after the committee was announced and that she was supportive of him, along with committee member Jamil Nazarali, from market making firm Citadel Securities, formally representing retail interests.
Citadel and BATS do not directly interact with retail investors, and their interests sometimes diverge from retail brokers'.
The SEC declined to comment, and hasn't said how it chose the committee members.
The major retail brokerages, including Charles Schwab Corp, TD Ameritrade, E*Trade, Fidelity and Scottrade, also declined to comment on the record.
Once the regulator made the names of the panel public, some retail brokerages began lobbying for a seat at the table, but were told that the process would not be restarted, according to people familiar with the matter who did not have permission to speak publicly.
"We were kind of shocked," said a senior executive at one retail brokerage. "I mean, if you're going to talk about market structure and how it impacts investors, you might want to have someone who deals with retail investors."
The SEC told the retail brokers that they will have opportunities to post public comment letters on the issues discussed by the committee and that the firms would also be included in separate roundtable discussions on market structure issues, the executive said.
In the meantime, the firms will use the retail advisory committee formed by BATS and Citadel will serve as their proxy.
"If you're not going to be part of the club, you've got to have somebody that at least is going to express your point of view at the club meetings," the executive said.