As we approach a potentially volatile session, with the Federal Reserve decision set for this afternoon, investors are paying attention to big movers in the market. Among the leading decliners is financial services company Virtu Financial (NASDAQ:VIRT), which is down more than 5% in today’s session. This move brings the decline from this year’s peak for VIRT stock to nearly 5%.
While some of this may be attributed to uncertainty around today’s decision, there’s bigger news investors are paying attention to. Today, the U.S. Securities and Exchange Commission (SEC) put forward various proposals aimed at changing the way equities are traded. As a key handler of online orders for various brokers who utilize payment for order flow (PFOF), Virtu Financial is one company that appears to be in the crosshairs of regulators right now.
Let’s dive more into what these proposals are, and why VIRT stock is taking such a big hit today.
Why Is VIRT Stock Plunging Today?
PFOF is a controversial piece of the equity trading puzzle. Now commonplace among many online brokers, PFOF involves the selling of investors’ trades (or order flow) to brokerage houses in exchange for compensation. This offsets the fees that were traditionally paid to place a trade. Thus, the whole zero-fee trading environment that traders enjoy today is largely due to this industry practice.
That said, increased scrutiny from regulators has pushed the SEC to consider changes to the existing PFOF system. While it appears that PFOF won’t be outright banned, various proposals pushing for “fair and open auctions” suggest that restrictions in this space are likely coming. Just how punitive these changes will be for companies like Virtu remain to be seen.
The age-old question of whether the benefits outweigh the costs are likely to continue. Generally speaking, most investors are in favor of more transparency. No one likes the insinuation that there’s something nefarious going on behind the scenes. That said, much uncertainty remains around what this means exactly for companies like Virtu. Therefore, this already beaten-down name will likely see more volatility.
On the date of publication, Chris MacDonald did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
