Wall Street’s top regulator is pursuing the largest reform of the $51 trillion U.S. stock market in two decades. First, he will have to combat a significant industrial opposition effort.
SEC Chair Gary Gensler, a former Goldman Sachs partner turned progressive icon, is expected to launch a regulatory broadside against brokerage firms and trading giants, including Charles Schwab, Robinhood, and GOP megadonor Ken Griffin’s Citadel Securities in the coming weeks, according to interviews with over a dozen executives, lawmakers, regulators, and investor advocates.
In reaction to the 2021 meme stock saga, in which Robinhood and other brokerages faced criticism after being overloaded by trading in shares of businesses like GameStop and AMC, Gensler proposes rules that would overhaul the stock market’s infrastructure. Gensler, who served in key regulatory positions throughout the Biden and Obama administrations, has questioned whether investors function in a “fair and competitive” environment. He anticipated that he would crack down on the intricate network of payments and fees exchanges, brokerages, and trading businesses used to execute stock trades for investors.
While the recommendations have not yet been disclosed, industry officials have already begun discussing a potential lawsuit against the SEC. And an increasing number of Democrats are pushing Gensler to continue with caution, indicating a potentially dangerous political path ahead even among members of his party – one that would become far more perilous if Republican critics regain a majority in Congress.
Rep. Ritchie Torres, a New York Democrat on the House Financial Services Committee, stated in an interview, “We must be careful not to toss the baby out with the bathwater.”
Gensler’s proposal to restructure the stock market is becoming one of the most controversial parts of an already ambitious plan that has also attempted to impose historic climate disclosure standards on public businesses and manage the largely unregulated cryptocurrency sector.
At many of Wall Street’s most prominent corporations, billions of dollars are at stake. SEC officials have discussed changing the trading regulations for years, but no significant changes have been made. According to Brett Redfearn, who chaired the SEC’s Trading and Markets Division during the Trump administration, “this is expected to be substantial.” He stated that Gensler wants to go large and believes Gensler hopes to build a name for himself on the U.S. equities markets.
Ultimately, the problem for Gensler is a set of long-held worries from investor advocates and progressives that the existing market is not designed for individual investors and institutional investors such as pension funds but Wall Street middlemen.
The SEC chairman has discussed six potential improvements. Among these are modifications to the pricing of stock trades on exchanges such as NYSE and Nasdaq, which, according to Gensler, are not competitive with alternative trading platforms that operate with greater regulatory freedom and less transparency. Today, approximately half of all market trading occurs on stock exchanges, with the remainder conducted by banks and brokerages operating private markets and processing deals directly. Gensler has also advocated more disclosures on how brokers execute customer orders, modifications to what constitutes the best pricing on the market, and strategies for shifting more trading to public exchanges.
In recent testimony before the Senate Banking Committee, Gensler stated, Since 2005, we have not changed important components of our national market system regulations, notably those relating to order administration and execution. Reflect on that. When you reach into your pocket, you will most certainly discover a phone that did not exist seventeen years ago. How would you fare in your job and personal life if you still employed 2005’s cutting-edge technology?
The issue is whether the SEC, led by Gensler, will be able to implement the measures despite considerable opposition. Some of the corporations with the most to lose — wholesalers and brokerages responsible for how and where individual investors execute deals — have already begun to prepare the framework for litigation, including compiling data to challenge the SEC’s economic justification for the changes.
In an interview, Doug Cifu, CEO of Virtu Financial, a large middleman that performs retail stock trades, stated, “Everyone would sue.” It would be a conga line to the court in Washington, D.C.
As chair of the Commodity Futures Trading Commission under the Obama administration, Gensler faced legal difficulties while working to reign in derivatives trading that destabilized corporations such as AIG.
During the Obama administration, Gensler’s willingness to tackle strong financial corporations made him a hero of the left, who succeeded in convincing President Joe Biden to rehire him.
Consumer advocate and CEO of Better Markets Dennis Kelleher collaborated with Gensler on Biden’s presidential transition team.
Congress instructed Gensler to establish post-crisis financial regulations under the Obama administration, but legislators have not approved legislation forcing him to update stock market laws. Executives claim that Gensler is acting opportunistically by capitalizing on last year’s meme stock scandal. The episode drew attention to how trading giants such as Citadel Securities and Virtu have come to handle an estimated 70 percent of retail stock orders, earning a commission on each transaction, thanks in part to arrangements in which they pay stock brokerages such as Schwab and Robinhood hundreds of millions of dollars annually to execute their customers’ orders.
Dan Gallagher, the chief legal officer of Robinhood and a former Republican SEC commissioner, expressed concern that the agency is seeking an unneeded change of a system that works effectively for investors who can buy and sell equities without incurring commission costs. Gallagher stated in an interview that the SEC is seeking a “theoretical nail” to drive home. In February 2021, Robinhood angered officials when it halted trading in GameStop and other popular stocks to pay $3 billion in financial commitments owing to a stock clearinghouse.
None of this would occur if there were no GameStop, no AMC, and no Robinhood nearly going out of business, Cifu added. It’s nothing more than market structure political theater.
While Gensler recognized the ease with which individuals may access the market today, the SEC chair suggested that the system should be improved for investors. A bipartisan group of legislators, including Democrats representing districts near key financial centers, are beginning to express concern about the escalating conflict.
Rep. Bill Foster (D-Ill.), a member of the House Financial Services Committee who is asking the SEC to utilize a pilot program before proposing changes to the larger market, said, You don’t want to conduct a big reorganization of how things function without some sense of how it’s going to work.
Torres, who represents the Bronx, advised the SEC to proceed cautiously. In reaction to the trading halts at Robinhood and others, he stated that Gensler’s SEC has begun reducing the time it takes to settle stock trades, and this is one of the policy recommendations in response to the trading halts. According to him, payment for order flow agreements between brokerages and trading businesses has reduced consumer expenses and allowed more people to access the market. Torres stated legislating or regulating in response to a single occurrence has unexpected repercussions.
Adding to the list of issues is the possibility that Republicans could gain control of the House in the November elections, allowing them to examine and oppose Gensler’s ideas.
Laura Peavey, a spokesman for the Republicans on the House Financial Services Committee, stated that GOP members are prepared to examine the revisions along with the rest of Gensler’s agenda at the SEC. She stated that the organization had not yet produced a “serious cost-benefit analysis.”
The conflicts of interest that have evolved have become ingrained and fundamental to intermediaries’ business models, said Tyler Gellasch, a former SEC official who now directs the Healthy Markets Association. This investor advocacy group has been calling for many changes Gensler is expected to propose. The real question is how far this commission will go to safeguard investors.