The frantic trading of meme stocks and speculation in cryptocurrencies seem to have fallen into the sights of the new head of the Securities and Exchange Commission.
the SEC chairman did not explicitly say that the regulator is targeting any specific company or product. But in comments this week, he has started to set milestones on those issues.
At the a Wall Street Journal conference Earlier this week, Gensler said the agency was looking at how an increasing proportion of trading takes place off exchanges, on platforms operated by high-frequency traders. Almost all the major brokers in the US now place orders with these market makers and receive a share of the money they make in the spread between the buy and sell prices.
The system, known as pay-per-order flow, helps brokers earn enough money on the backend so they can more easily charge zero commissions for trades. But trades between brokers and market makers are opaque, and the SEC chief wants to open them up to more sunshine — and possibly change the rules. Gensler said he asked the SEC staff to “improve and update” rules around market structure that could affect big players like Citadel Securities and
Gensler notes that countries like Canada and Australia have banned payment for the order flow. Furthermore, “even in Europe they think there is an inherent conflict between better execution and these payments,” he said.
Some brokers, like Robinhood, rely on payment for the order flow for a particularly large portion of their revenue compared to their peers. And last year, the SEC found out that Robinhood had been doing deals for years with market makers that were bad for their clients—so bad, in fact, that they often outweighed the benefit those clients got from not paying a commission on the trades. Robinhood has neither admitted nor denied the complaints and said it has changed its practices regarding the order payment flow. The SEC’s allegations covered the years 2015 to 2018.
Asked about zero-commission applications this week, Gensler said “It’s not free trade,” given the money brokers earn from paying for the order flow.
A Robinhood spokesman said in a statement in response to Gensler’s comments about possible changes in the market structure that the company “would expect to engage with the SEC through its formal rules-making process when considering changes to the current structure of the market. market, which is working so well for an increasingly diverse universe of investors.”
The spokesman declined to comment on Gensler’s “free trade” statement.
Some other commentators said that a ban on payment for order flow could jeopardize the zero-commission business model for trading apps. If commissions or other types of advance payments come back, it could affect the volume of meme stock trades, as with
(AMC). These trades took off in part because people can buy and sell small amounts of stock quickly, with no upfront cost.
The president’s comments come as the SEC is investigating meme stock trading for possible manipulation. GameStop revealed the inquiry in a bond deposit, saying that he had received a request for “documents and information regarding an SEC investigation into the trading activity of our securities and the securities of other companies. ”
The investigation is unlikely to affect small marketers who like to post silly jokes on the internet. Instead, the SEC appears to be looking for any indication that more sophisticated investors tried to manipulate the masses.
At the conference, Gensler also spoke about behavioral warnings in stock trading apps — an area where Robinhood was also criticized. These behavioral instructions are part of a lawsuit filed by the Commonwealth Secretary of Massachusetts against Robinhood that seeks revoke the company’s broker’s license in the state. Robinhood is challenging the state’s authority to do this.
The Robinhood app offers users free actions when they point the app to others and uses visual cues, such as a scraped lottery ticket system, to get their free actions that some critics say look more like gambling or lottery games. than sensible investments.
Gensler said that behavioral stimuli “drive us to do more activities” and that often hurts stock returns, studies show. “It’s good to invest, but it’s good to be moving a lot, or opening an option or margin account and behavioral requests are driving more activity than average would lead to better returns,” he said.
Robinhood said he does not encourage trading or recommend stocks and that most of its users are “buy and hold” investors. He announced changes to some of the visual cues in the app, including the confetti that drops after the first user switch. The company did not comment on Gensler’s most recent comments about behavioral suggestions.
Gensler was also asked about CNBC on the prospects of a Bitcoin exchange-traded fund. A number of applications are pending with the SEC from companies seeking to offer such a fund. He made no predictions about an ETF, but pointed to the perils of the market when asked whether fraud and manipulation would lead the SEC to deny authorization for Bitcoin ETFs again.
“Investors should be aware – I’m saying this in my own voice – that in the underlying Bitcoin spot markets, there isn’t the robust oversight that you have in the stock market or derivatives markets,” he said. paired with another recent SEC statement on the limitations of an ETF, Gensler’s comments could set a high bar for an ETF – one that companies won’t be able to surpass this year.
write to email@example.com