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SEC Chairman Gary Gensler.

Evan Vucci/Associated Press

The Securities and Exchange Commission is looking at changing rules around share trading after the day-trader frenzy around meme stocks showed equity markets may not be as efficient as they could.

Chairman Gary Gensler said Wednesday he has asked the regulator's staff to submit recommendations on a range of market rules, including the high fees paid to Wall Street brokers for executing small-investor orders and the rise of commission-free brokerage apps.

Their recommendations will address the issue of payment for order flow, or the compensation online brokers receive when stock orders are routed to third-party firms like Virtu Financial and Citadel Securities in order to carry out the trade.

Shares in Virtu fell 7.7% after Gensler's comments. The high-speed trader handles about one-third of individual investors' order flow in US stocks, according to the Wall Street Journal. Virtu's stock rallied this year alongside the meme-stock frenzy, while Citadel Securities isn't publicly traded.

Gensler previously called out popular investing apps like Robinhood that have introduced millions of amateur investors to stocks through the lure of zero commissions. He criticized the company for encouraging the gamification of the stock market, and for not doing enough to educate its user base of the risks associated with investing.

Robinhood's business model, which operates on a system of payment for order flow, allows it to offer so-called "commission-free trading." But some lawmakers have called for increased examination into the potential conflict of interest it presents its users.

The SEC will look into this practice, that uses phone alerts and other notifications to get investors to trade more, Gensler said at a Piper Sandler conference in New York.

"The question is whether our equity markets are as efficient as they could be, in light of the technological changes and recent developments," he said.

Most of these issues came to regulatory attention after day traders used social platforms like Reddit to bid up prices of heavily-shorted stocks like GameStop, fuelling an over 1,200% surge in the video-game retailer's stock in January.

More recently, a string of so-called meme stocks including AMC, Bed Bath & Beyond, and BlackBerry saw $1.27 billion in retail investor inflows in the past two weeks. That matches the peak of GameStop's short squeeze earlier in the year.

New SEC rules could impact the business models that online brokerages use, meaning Robinhood and its competitors would have to operate under new guidelines.

"Brokers profit when investors trade," Gensler said. "For those brokers who have these arrangements - and not all do - higher trading volume generates more payment-for-order flow. What makes the current zero-commission brokerage environment different is that investors do not see their costs as they're executing trades, so they may perceive them as free."

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