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What do auction houses have to do with the stock market?

Auction houses bring buyers and sellers together for sales of items in a competitive way. It could be sales of baseball cards, antique rugs, and other items. If you’re selling something, you can often benefit from the transparency and competition of an auction.

We see some examples of auctions in our financial markets. Stock markets, for example, use auctions at the beginning and end of the day to determine the price.

The goal is getting the best out of competition. Now, there are many ways to instill competition in our financial markets, including through enhancing transparency, broadening access, creating fair playing fields – and auctions are just one of those ways.

Let’s look at the current market to see why it would benefit from greater competition.

Let’s say you, an investor, put in an order to buy or sell 10 shares of stock. You might think your trades benefit from robust competition similar to an auction, or perhaps it would have the transparency of a lit stock exchange. Right?

Well, actually it turns out more than 90 percent of retail investors’ marketable orders are actually routed to a small group of off-exchange wholesalers, operating in what’s called the dark market. That doesn’t seem to promote the greatest competition or fairness.

The idea of competition is particularly relevant when it comes to your marketable orders. And that’s because there’s a “sweetness” about those retail orders. Let me say why.

You see, typically everyday investors like you aren’t making large trades of tens of thousands of shares, or millions of dollars. So, these smaller orders that you’re making generally don’t move the price of the stock, and thus, there’s a benefit for those brokers on the other side executing to fill your orders.

I think the retail public deserves the full benefit of competition for the sweetness of your marketable orders. And I think it’s time to breathe more competition into the equity market.

That’s what we’re trying to accomplish at the Securities and Exchange Commission. This last December, the Commission proposed to require that those marketable orders of individual investors of a certain size be exposed to competition in fair and open auctions.

Now, the executing broker might get you a price that’s midpoint or better. That would be great. But otherwise, they would have to compete in good old’ fashioned auctions. These auctions would include competition from hundreds or thousands of other market participants to get retail investors’ orders.

According to analysis done by SEC economic staff, the shortfall of lacking some of that competition could be worth $1.5 billion annually—money that could go back to your pockets and your portfolio and your future.

Sounds like a win to me.