Chairman of the U.S. Securities and Exchange Commission, Gary Gensler, is standing up for the little guys. Yesterday, Gensler proposed major changes to the stock market, making it cheaper for retail investors to execute trades and providing more transparency into the process.

“Free” is never free: If Robinhood offers “commission-free” trades, how do they make money? Through a process called payment for order flow (PFOF).

• When you initiate a trade, Robinhood gets paid for routing your orders to market makers like Citadel Securities, who executes the trade.
• Current rules let brokers like Robinhood send trades to wholesale market makers as long as it matches or meets the best possible price on U.S. exchanges.

Gensler previously said this practice limits competition and creates conflicts of interest.

What’s changing? Gensler wants to get investors the best possible pricing on their trades.

• He proposed to route orders to an auction house where firms compete for those trades — which could lower prices.
• Gensler also wants mandated public reports on trade-execution performance by market makers.

These changes could reduce profits at market makers and impact brokers’ ability to offer commission-free trades, which has been a big draw for investors. Last year, Gensler said getting rid of PFOF was “on the table” (Barron’s) — which could significantly impact Robinhood’s business.

Pushback: Formal proposals could be announced later this year, but getting changes through won’t be easy — especially when billions are on the line for Wall Street.

• Robinhood’s Chief Legal Officer criticized the plans — saying investors are already enjoying zero-commission trade and fast trade execution (WSJ).
• Citadel said in a statement that the current structure leads to more transparency and lower costs for retail investors (Barron’s).