Gensler also addresses corporate climate change risk disclosure but does not mention crypto crash
Securities and Exchange Commission Chairman Gary Gensler remained focused on issuing new regulations related to zero-commission trading platforms rather than the crash in cryptocurrency prices in June, which by late Monday had led to the evaporation of roughly $1.3 trillion in wealth, two public appearances on Wednesday suggest.
The U.S. regulator is concerned about zero-commission trading platforms that send retail customer orders to market makers in exchange for so-called payment for order flow, a controversial system that critics say creates a conflict of interest between those brokers and their customers. Though the practice has been around for a while, it has become increasingly widespread after online broker Robinhood began to offer free trading in 2014.
This practice, Gensler said during the London City Week virtual conference Wednesday morning, has lead to roughly 40% of retail stock trades being routed to market makers rather than stock exchanges like the New York Stock Exchange or Nasdaq $(NDAQ)$.
"Thus, significant trading interest on these platforms is not necessarily being reflected in the commonly cited trading systems, which include dark pools, and by off-exchange wholesalers," he said, referring to data collected by "lit" exchanges, like the NYSE. With roughly half of all stock orders left out of those calculations, it's actually difficult to know which prices retail investors are entitled to, he added.
A zero commission trade, is not "not free. It just simply isn't," Gensler said in a subsequent interview on Bloomberg TV. "It might be zero commission, but underneath that...some of these brokers are then selling your orders to another firm," he added. "Why is somebody paying for it, is it because there's an inherent conflict, even if it's a penny or two or some small fraction, that's trading off you, the retail public? So, it's not free."
Gensler also questioned the usefulness of Special Purpose Acquisition Companies (SPACs), which raise cash through an initial public offering, after which the shell company has two years to use the raised funds to purchase a private company, thereby making that company public. Recent academic research has shown that SPACs are a much more expensive way to take a company public, and that those extra costs are placed on the end retail investor.
"These are very expensive, dilutive products," he told Bloomberg TV. "The sponsor takes out a chunk at the beginning then there's more to be taken out later when they merge with a private company."
The SEC chairman also focused on his continued push to create a new regulatory disclosure regime that would force public companies to disclose risks posed by climate change. Such a regime is strongly opposed by Republicans in Congress who say that it's an attempt coerce public companies into addressing climate change, rather than an honest attempt to inform investors.
In a June 14 letter to Chairman Gensler and his predecessor Commissioner Allison Herren Lee, 12 Republicans on the Senate Banking Committee said "We do not believe that any further securities regulations to specifically address global warming are necessary or appropriate, and will only serve to further discourage firms from becoming publicly traded, thus denying significant investment opportunities to retail investors."
On Wednesday, Gensler was resolute in his belief that climate disclosures are important for investors to make informed decisions in the marketplace. "I have deep respect for those senators who wrote that letter," he told Bloomberg TV." However, he added, "Investors want to know more about this very important risk, climate risk, how companies deal with whatever transition might be in the future, whatever physical risks that they have and how are they managing it."
It's notable that Gensler did not address his thoughts about investor protection with respect to cryptocurrencies, given his past statements on the need for more rules affecting the market for digital assets, as well asthe recent volatility in the market for digital assets.
In a before the House Appropriations Committee in May, Gensler said there were "gaps" in regulation of cryptocurrencies, like bitcoin and ether , noting that there are "thousands" of them extant, many of which are operating as securities. "We've only been able to bring 75 actions and there are others currently that are not compliant."
Gensler added that he would like to work with Congress "to bring investor protection to the platforms, where these sometimes-commodities, sometimes-securities are trading on the platform."
He gave the example of the practice of front running, whereby an exchange could share order information so that another investor can trade ahead of a crypto transaction, making other investors' purchase or sale more expensive, noting that "Without a cop with a beat and some rules of the road, then market participants can front run your orders."
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