SEC's Gensler talks hidden costs of retail trading, crypto regulation gaps
(Kitco News) With the retail investing gamification debate still top of mind for U.S. lawmakers, Securities and Exchange Commission (SEC) Chairman Gary Gensler testified on hidden costs of free retail trading and highlighted gaps in the crypto regulation oversight.
In the testimony to the Senate Banking Committee, Gensler highlighted the SEC's goal of protecting investors and pointed to new challenges arising from new technologies and predictive data analytics tools.
"New financial technologies continue to change the face of finance for investors and businesses. More retail investors than ever are accessing our markets," Gensler said on Tuesday. "Currently, we just don't have enough investor protection in crypto finance, issuance, trading, or lending."
Hidden costs of retail trading
Gensler outlined that free retail trading has hidden costs that might be working against the investors' interests.
"Technology and competition have driven down the cost of investing. But there's still a cost left — payment for order flow. It is behind the scenes," Gensler said. "Can we do better to have more competition so that orders compete with orders rather than one wholesaler buying all of the retail flow in North America? My real concern is whether the competition is there."
Also, retail trading apps are using predictive data analytics tools to maximizing revenue, and the SEC will be looking into whether this puts investors in danger.
"These trading platforms are optimizing based upon our mobile apps. [They] maximize profits using all this data. And that brings us greater innovation and lower cost, but could it be a conflict? If the data analytics are maximizing the platform's revenues, that may conflict with maximizing the user's investment returns. And how do we square that?"
Gensler has asked the SEC staff to provide a list of recommendations on how to ensure a more level playing field.
"Nearly half of the volume transacted is executed in 'dark pools' or by wholesalers. One firm has publicly stated that it executes nearly half of all retail volume. Further, I wonder whether this means that the consolidated tape — the so-called National Best Bid and Offer — fully reflects the full range of activity on exchanges," he testified. "I believe payment for order flow and exchange rebates may present a number of conflicts of interest."
Gaps in crypto oversight
Gensler also that the SEC is looking at the gaps that it can fill with Congress's assistance when it comes to crypto oversight.
The crypto space continues to exist outside of the regulatory framework, which increases the risk to investors, Gensler said during his testimony.
"Frankly, at this time, it's more like the Wild West or the old world of 'buyer beware' that existed before the securities laws were enacted," he said. "This asset class is rife with fraud, scams, and abuse in certain applications. We can do better."
Going forward, the SEC will focus on the sale and offer of crypto tokens, crypto trading and lending platforms, stable value coins, investment vehicles providing exposure to crypto assets or crypto derivatives, and custody of crypto assets.
In terms of regulatory gaps, Gensler said there is a "great deal of clarity" around what is a security, but there are gaps when it comes to coordinating with banking agencies on stable coins and coordinating with other agencies, including the CFTC, when it comes to tokens and trading platforms regulation.
"In terms of legislation, the coordination between market regulators is strong. But there may be things that Congress can weigh in and help coordinate," he said. "With respect to investor protection, we're working with the CFTC, as our two agencies each have relevant, and in some cases, overlapping jurisdiction in the crypto markets. With respect to a broader set of policy frameworks, we're working with not only the CFTC but also the Federal Reserve, Department of Treasury, Office of the Comptroller of the Currency, and other members of the President's Working Group on Financial Markets on these matters."
Gensler described himself as "technology-neutral," adding that the crypto space is unlikely to last long if it stays "outside of the regulatory framework."
The SEC Chair once again urged companies to come forward and talk to the SEC directly. "Many platforms have dozens or hundreds of tokens on them. While each token's legal status depends on its own facts and circumstances, the probability is quite remote that, with 50, 100, or 1,000 tokens, any given platform has zero securities," he said. "Make no mistake: To the extent that there are securities on these trading platforms, under our laws they have to register with the Commission unless they qualify for an exemption."
Another theme that came up during the testimony is the need for more funding and resources. "We need to be sure that the Commission has the resources to protect [investors] … We could use a lot more people. There are 6,000 projects and many of them are securities under the laws."