You’d think that with the FTX scandal still raging and investors losing billions of dollars in supposed crypto accounts, Securities and Exchange Commission Chairman Gary Gensler would have so much on his plate that he wouldn’t have time to have fun in our capital city. well-functioning markets.
But sources tell me that Gensler is doing just that — preparing to unveil plans for the biggest changes in nearly two decades in how stocks are shifted from buyers to sellers. If Gensler’s timing is right, he will (perhaps this week) announce an open house for mid-December that will detail his plan to overhaul the nation’s $46 trillion stock market, as I first reported on Fox Business.
The idea is to complete his proposed changes by the end of the year – and they are quite significant.
Why the rush? Word inside the SEC is that Gensler wants to get most of that work done before the new GOP takes over Congress on Jan. 3. While investigations into Hunter Biden’s swamp business are high on the list of incoming committee chairmen, Gensler knows he also has an ambitious — some might say zealous — target for his progressive agenda at an agency whose primary mission is to protect investors from being ripped off by fraudsters.
Gensler The SEC has strayed so far from that mission that it wants to score left-wing points and join the Environmental Social Stewardship group by forcing companies to disclose non-financial metrics like how they’re reducing their carbon footprints.
Meanwhile, the House Financial Services Committee intends to find out what Gensler knew about the machinations of Democratic megadonor Sam Bankman-Fried, who is under criminal investigation in connection with the explosion of cryptocurrency exchange FTX. The company is now in bankruptcy, while SBF, as it is known, remains in the Bahamas.
Billions missing
As this column goes to print, countless billions in client money remain missing, presumably gambled away in Bankman-Fried’s prop-trade fund side hustle.
Here’s where it gets interesting: Gensler met with SBF months before the explosion. The SEC held additional meetings with the people of the fallen cryptocurrency and business partners looking to set up an exchange approved by the commission. GOPers want to hear how this is all happening right under the noses of Wall Street’s top cop.
Market structure, meanwhile, has not received the full attention of the incoming 118th Congress and its new GOP majority, but it should. The way we buy and sell stocks, the so-called plumbing of the market, is seen as a simple reason why the process works quite flawlessly, even if the process is quite complex.
It’s more complicated than a bunch of guys at the New York Stock Exchange yelling to match buyers and sellers.
For starters, most of those guys are gone, replaced by computers that can match orders in nanoseconds. The main public stock markets, the NYSE and Nasdaq, are not the only game in town, competing to match buyers and sellers with private exchanges and market makers, such as Citadel Securities and Virtu Financial. They are armed with highly efficient trading machines that can execute orders cheaply and still make a small profit. That’s why we have low-cost and, in Robinhood’s case, free trading platforms.
The system isn’t perfect, of course (see what happened in the early stages of the meme-stock frenzy of 2020-21). There are outages and price discrepancies due to computer errors. But it’s working pretty well, and by most measures, small investors are benefiting greatly from better execution and lower trading costs — exactly the way the SEC intended when it last implemented the changes.
Everything can be improved – but should it be?
The core of Gensler’s proposal could cost retail investors billions of dollars, according to people briefed on the matter. I don’t have all the details, but broadly, he wants trades by small investors to be routed separately to various public auctions, possibly run by the NYSE or Nasdaq — a change that the SEC envisions would greatly reduce competition. His hypothesis is that there are nefarious things going on in private places where burglaries can occur.
What are these thefts? Gensler didn’t really say. Do we have evidence that low- or no-fee discount brokers cover hidden costs incurred by market makers? Nope.
Looking for titles
So why is Gensler trying to fix what isn’t broken? Some people in the markets say he is just seeking headlines and ingratiating himself with Wall Street-hating progressive Sen. Elizabeth Warren, who has a big say in President Biden’s appointments to economic roles in the administration. Gensler is expected to be Treasury secretary when Janet Yellen steps down next year.
Others say he really sees Wall Street as a cesspool of corruption. Perhaps we’ll learn more at the next SEC public hearing, or maybe Gensler will refuse to fix something that isn’t broken and realize his time is better spent finding the untold billions still missing from FTX client accounts.