Gensler Talks GameStop Volatility at SEC Nomination Hearing
Issues such as best execution, trading apps and payment for order flow need review in light of the recent trading frenzy, he says.
During his nomination hearing Tuesday, Gary Gensler — President Joe Biden’s pick to be the next chairman of the Securities and Exchange Commission — laid out the steps he’d mull to address the recent market volatility related to the GameStop Reddit squeeze, as well as his approach to regulating cryptocurrencies.
The SEC’s Regulation Best Interest, however, was not discussed during the hearing.
Sen. Sherrod Brown, D-Ohio, chairman of the Senate Banking Committee, stated during the virtual hearing that over the last few months, “we’ve seen unprecedented volatility in trading and many stocks, most notably GameStop — wild trading drove the stock price from $18 at the beginning of January to $325 at the end of the month.
“People are using the term ‘gamification,’ but we know Wall Street has treated markets as a game for years,” Brown said. “We can’t forget how this affects real people; real peoples’ hard-earned pension funds, their 401(k)s, small business investment, college savings, their down payments for a home — all at stake.”
Brown probed Gensler on the steps the securities regulator would take to address the volatility and its impact on investors.
Gensler responded: “In some ways it’s a story as old as markets themselves, the clash between buyers and sellers and opposing views. But in other ways, the story is about this new technology and technology changing constantly finance.”
If confirmed as SEC chief, Gensler said he’d review the following questions:
- “How to ensure that customers still get best execution in the face of payment for order flow?”
- “How to protect investors using trading applications with behavioral prompts designed to incentivize customers to trade more?”
- “How to ensure customers access to markets when those apps may, at times, fall short of needed margin funds?”
- ” How to promote competition in markets when a few firms may come to dominate those markets?”
- “And how to update back-office infrastructure to lower risks and costs.”
Sen. Jack Reed, D-R.I., asked Gensler if he’d “evaluate payment for order flow and related practices to determine whether retail investors truly benefit.”
Gensler replied: “Yes. I think technologies change and markets change, but we should always evaluate new approaches to markets, and payment for order flow is something that the recent [trading] events … it’s important to look at economically and look at whether retail investors are getting best execution.”
As to regulation of cryptocurrencies, Gensler — a professor of blockchain, digital currency, financial technology and public policy at the Massachusetts Institute of Technology — stated that technology innovations “have been a catalyst for change, like Bitcoin.”
Cryptocurrencies, he continued, “have brought new thinking to payments and financial inclusion, but they’ve also raised new issues of investor protection that we still need to attend to.”
If confirmed, “I’d work with fellow commissioners to both promote the new innovation but also at the core, ensure for investor protection.”