You would think that with the FTX scandal still brewing and investors missing billions of dollars from their supposedly secured crypto accounts, Securities and Exchange Commission chair Gary Gensler would have so much on his plate, he wouldn’t have time to muck around in our capital markets, which are working just fine.
But sources tell me Gensler is doing just that — preparing to unveil plans for the biggest changes in about two decades to the way stocks are routed from buyers to sellers. If Gensler’s timing holds, he will announce (possibly this week) an open meeting for mid-December that will detail his plan to remake the nation’s $46 trillion stock market, as I first reported on Fox Business.
The idea is to jam out his proposed changes — and they’re pretty significant — before year’s end.
Why the rush? The word inside the SEC is that Gensler wants to get much of the work on it done before the new GOP Congress takes over Jan. 3. While a probe of Hunter Biden’s swampy business dealings is high on the list of the incoming committee chairs, Gensler knows he also has a target on his back for his ambitious — some would say zealous — progressive agenda at an agency that has a core mission of protecting investors from being ripped off by scammers.
The Gensler SEC has moved so far beyond this mission that he’s looking to score lefty points and join the Environmental Social Governance bandwagon by forcing companies to disclose non-financial metrics such as how they are reducing their carbon footprint.
The House Financial Services Committee, meanwhile, is intent on grilling Gensler on what he knew about the shenanigans of Sam Bankman-Fried, the Democratic megadonor under criminal investigation over the implosion of the crypto exchange FTX. The company is now in bankruptcy, while SBF, as he’s known, remains in the Bahamas.
Billions missing
As this column goes to press, countless billions in customer money remain missing, likely gambled away in Bankman-Fried’s side hustle of a prop-trading fund.
Here’s where things get interesting: Gensler met with SBF months before the blowup. The SEC had additional meetings with the fallen crypto bro’s people and business partners who were looking to start a commission-approved exchange. GOPers want to hear how all this occurred under the nose of Wall Street’s so-called top cop.
Market structure, meanwhile, hasn’t really caught the full attention of the incoming 118th Congress and its new GOP majority yet, but it should. The way we buy and sell stocks, the so-called plumbing of the market, is often taken for granted for the simple reason that it works pretty seamlessly even if the process is pretty complex.
It’s more complicated than just a bunch of guys on the New York Stock Exchange screaming out bids 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 the Nasdaq, aren’t the only game in town and are in competition to match buyers and sellers with private exchanges and market makers, companies like Citadel Securities and Virtu Financial. They’re armed with highly efficient trading machines that can match orders cheaply and still skim a bit and make a profit. It’s why we have low-cost and, in the case of Robinhood, no-fee trading platforms.
The system isn’t perfect, of course (see what happened during the early stages of the so-called meme-stock craze of 2020-21). There are outages and price discrepancies due to computer errors. But it works pretty well, and by most measures small investors benefit greatly from better execution and lower trading costs — just the way the SEC intended the last time it instituted changes.
Anything can be improved — but should it?
The main thrust of Gensler’s proposal, according to people briefed on it, could cost retail investors billions of dollars. I don’t have all the details, but broadly he wants trades made by small investors to be routed separately into various public auctions, presumably run by the NYSE or Nasdaq — a change that would significantly reduce competition that the SEC intended. His hypothesis is that there’s nefarious stuff going on in those private venues where rip-offs might be going down.
What are those rip-offs? Gensler hasn’t really said. Do we have evidence that cheap or no-fee discount brokers are covering up hidden costs on execution performed by market makers? No.
Looking for headlines
So why is Gensler looking to fix what isn’t broken? Some people in the markets say he’s merely looking for headlines and to curry favor with the Wall Street-hating progressive Sen. Elizabeth Warren, who has a big say in President Biden appointments for economic roles in the administration. Gensler is eyeing treasury secretary when Janet Yellen steps down next year as expected.
Others say he really does think Wall Street is a sewer of corruption. Maybe we will find out more at the SEC’s next open meeting, or maybe Gensler will drop his fixation with fixing something that’s not broken and realize his time is better spent finding those countless billions still missing from those FTX customer accounts.