The frenzied trading of memes stocks and speculation in cryptocurrencies seem to be hitting the target of the new head of the Securities and Exchange Commission.
Gary Gensler, chairman of the Securities and Exchange Commission, did not explicitly say that the regulator is targeting any particular company or product. But in the comments this week, he began to provide guidance on these issues.
At the Wall Street Journal conference earlier this week, Gensler said the agency is studying how an increasing proportion of trading takes place off-exchange, on platforms run by high-frequency traders. Almost every major brokerage firm in the US now places orders with these market makers and receives a portion of the money they earn from the bid / ask spread.
A system known as pay-per-order flow helps brokers make enough money on the back end to make it easier for them to charge zero commission on trades. But deals between brokers and market makers are opaque, and the SEC chief wants to open them up to more sunlight – and possibly change the rules. Gensler said he asked SEC officials to “improve and update” rules regarding market structure that could affect major players such as Citadel Securities and
Gensler notes that countries including Canada and Australia have banned payment for order flow. In addition, “even in Europe, they see it as an internal conflict between the best performance and these payments,” he said.
Some brokers, such as Robinhood, rely on order flow payments to generate a particularly large portion of their income when compared to their counterparts. And last year, the SEC discovered that Robinhood had been doing deals with market makers over the years that were bad for their clients – so bad that they often outweighed the benefits customers received from not paying commission on trades. Robinhood did not acknowledge or deny the claim and stated that it has changed its practice with regards to payment for order flow. The SEC’s allegations span from 2015 to 2018.
When asked about zero commission apps this week, Gensler said, “This is not free trading,” given the money brokers make paying for order flow.
A Robinhood spokesman said in a statement in response to Gensler’s comments on possible changes in market structure that the company “looks forward to engaging with the SEC as part of its formal rule-making process as it considers changes to the current market structure that operates. so good for an increasingly diverse investor world. ”
A company spokesman declined to comment on Gensler’s “free trade” statement.
Several other commentators have said that a ban on order flow payments could jeopardize a zero-commission business model for trading apps. If commissions or other types of advance payments are returned, this may affect the volume of exchange trading, for example, with
(AMC). These trades have become popular in part because people can quickly buy and sell small amounts of stocks without any upfront cost.
The chairman’s comments came at a time when the SEC is investigating the Meme stock trade for possible manipulation. GameStop disclosed the request in the securities filing, stating that it received a request for “documents and information relating to the SEC’s investigation of trading activities with our securities and the securities of other companies.”
This request is unlikely to affect small traders who like to post silly jokes on the Internet. Instead, the SEC appears to be looking for any signs that more sophisticated investors have tried to manipulate the masses.
At the conference, Gensler also talked about behavioral cues in stock trading apps – an area where Robinhood is also being criticized. These behavioral clues are part of a lawsuit filed by the Massachusetts Secretary of State against Robinhood seeking to revoke the company’s broker license in the state. Robinhood challenges the state government to do so.
The Robinhood app provides users with free promotions when they direct other people to the app and uses visual cues like the scratch-off lottery ticket system to get your free promotions, which some critics say makes them look like gambling or lottery. not wise investment.
Gensler said that behavioral cues “make us do more activity,” and this often affects stock returns, studies have shown. “It’s good to invest, but is it good to move a lot or open options or margin accounts, and behavioral cues lead to more activity than average, lead to higher returns,” he said.
Robinhood stated that it discourages trading or recommends stocks, and that the majority 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 user’s first transaction. The company did not comment on Gensler’s recent comments on behavioral cues.
Gensler was also asked on CNBC about the prospects for the Bitcoin-traded fund. A number of applications are pending with the SEC from companies looking to offer such a fund. He did not make any predictions about ETFs, but pointed out the dangers of the market when asked if the SEC’s fraud and manipulation would force the SEC to deny authorization to Bitcoin ETFs again.
“Investors need to know – I say this in my own voice – that the underlying bitcoin cash markets do not have the strong controls that you have in the stock market or derivatives markets,” he said. Combined with another recent SEC statement on ETF restrictions, Gensler’s comments could set a high bar for ETFs that companies won’t be able to surpass this year.
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