SEC Sets Sights on Technologies That Spurs Excessive Trading

Someone using a trading app on their phone

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The Securities and Exchange Commission (SEC) is seeking public comment on newly proposed rules that require trading platforms, such as Robinhood, to take steps to address conflicts of interest associated with their use of predictive data analytics and other technologies that may influence excessive trading.

The deadline for submitting comments is 60 days after the agency publishes the proposal in the Federal Register.

On July 26, the agency voted 3-2 vote in favor of the 243-page proposal, which aims to help protect customers of trading platforms from potential conflicts of interest.

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“We live in an historic, transformational age with regard to predictive data analytics and the use of artificial intelligence,” SEC Chair Gary Gensler said in a statement. “Today’s predictive data analytics models provide an increasing ability to make predictions about each of us as individuals. This raises possibilities that conflicts may arise to the extent that advisers or brokers are optimizing to place their interests ahead of their investors’ interests.”

Advanced technology use is up

The SEC said that the use of predictive data analytics and other advanced technologies by broker-dealers and investment advisors has accelerated.

While the new technologies can bring benefits in market access, efficiency and returns, they may also have the potential to put the interest of the companies ahead of their customers, the SEC said. This “could cause harm to investors in a more pronounced fashion and on a broader scale than previously possible,” the agency added.

While the SEC’s existing framework, Regulation Best Interest, requires firms to put the interests of investors ahead of their own, the new proposal would update this framework to address potential conflicts associated with the use of new advanced technologies.

“I believe that, if adopted, these rules would help protect investors from conflicts of interest — and require that, regardless of the technology used, firms meet their obligations not to place their own interests ahead of investors’ interests,” Gensler said.

In response to Kiplinger’s request for comment, Robinhood’s Chief Brokerage Officer Steve Quirk said that technology “has led the way in making investing accessible to tens of millions of Americans who were previously shut out.”

But the SEC’s proposal would bring U.S. financial markets back to “the old, manual days when retail investors were forced to interact with their broker or advisor by phone or at a branch office,” Quirk said. “This isn’t in anybody’s best interest, least of all the new generation of retail investors.”

Joey Solitro is a freelance financial journalist at Kiplinger with more than a decade of experience. A longtime equity analyst, Joey has covered a range of industries for media outlets including The Motley Fool, Seeking Alpha, Market Realist, and TipRanks. Joey holds a bachelor's degree in business administration.