The frenzied meme stock trading and speculation in cryptocurrencies seem to have landed in the crosshairs of the new head of the Securities and Exchange Commission.
Gary Gensler, the chairman of the SEC, did not specifically state that the regulator is targeting any particular company or product. But in this week’s comments, he’s started to put markers on these topics.
At the a Wall Street Journal conference Earlier this week, Gensler said the agency is investigating how an increasing proportion of trading outside of the exchanges is happening on platforms operated by high-frequency traders. Almost every large brokerage company in the US now forwards orders to these market makers and receives part of the money they make on the spread between the bid and ask prices.
The system known as payment for order flow helps brokers make enough money in the back end that they can more easily not charge commissions on trades. But the deals between the brokers and the market makers are opaque, and the SEC chief wants to open them up to more sunlight – and possibly change the rules. Gensler said he had asked SEC officials to “improve and update” the market structure rules that major players such as Citadel Securities and
Gensler notes that countries like Canada and Australia have banned payment for order flow. Moreover, “they find it even in Europe as an inherent conflict between best execution and these payments,” he said.
Some brokers, like Robinhood, rely on the payment of the order flow for a particularly large portion of their sales compared to their competitors. And last year the SEC found that Robinhood has closed deals with market makers for years bad for their clients – so bad, in fact, that they often outweighed the benefit those clients got by not paying commissions on trades. Robinhood has neither admitted nor denied the claims, saying that it has changed its practices regarding payment for the order flow. The SEC’s allegations related to the years 2015 to 2018.
When asked about toll-free apps this week, Gensler said, “It’s not free trading,” given the money brokers make by paying for the flow of orders.
A Robinhood spokesperson said in a statement in response to Gensler’s comments on possible changes to the structure of the market that the company “looks forward to working with the SEC through its formal rulemaking process as it contemplates changes to the current structure of the market that is working “. so good for an increasingly diverse universe of investors. ”
The spokesman declined to comment on Gensler’s “free trading” statement.
Some other commentators have said that a ban on paying for order flow could jeopardize the commission-free business model for trading apps. If commissions or other types of prepayments come back, this could be the volume in meme stock trades like in. influence
(AMC). These trades took off in part because people could buy and sell a small number of stocks quickly with no upfront cost.
The chairman’s comments come as the SEC investigates Meme stock trading for possible tampering. GameStop the request disclosed in a securities registration stating that they have received a request for “documents and information” regarding an SEC investigation into trading activities in our securities and those of other companies. “
The research is unlikely to affect small traders who enjoy posting silly jokes on the internet. Instead, the SEC appears to be looking for evidence that more sophisticated investors were trying to manipulate the masses.
At the conference, Gensler also spoke about behavioral prompts for stock trading apps – an area in which Robinhood has also come under fire. These codes of conduct are part of a lawsuit filed against Robinhood by the Secretary of the Commonwealth of Massachusetts revoke the company’s broker license in the state. Robinhood challenges the authority of the state to do so.
The Robinhood app gives users free shares when they refer other people to the app and has used visual cues like a scratch card lottery ticket system to get your free shares that some critics say are more likely to be Remember gambling or lottery as sensible investments.
Gensler said that behavioral prompts “make us more active,” and that often hurts stock returns, studies have shown. “It’s good to invest, but it’s also good to make a big move, or open an options or margin account, and the behavioral prompts lead to more activity than average would result in better returns,” he said.
Robinhood has said that it does not encourage trading or recommending stocks, and that most of its users are buy-and-hold investors. It announced changes to some of the visual cues in the app, including the confetti that drops after a user makes a first trade. The company has not commented on Gensler’s latest comments on behavioral prompts.
Gensler was also asked CNBC on the prospects for an exchange traded bitcoin fund. A number of applications from companies wishing to offer such a fund are pending with the SEC. He made no predictions about an ETF, but pointed out the dangers of the market when asked if fraud and manipulation would cause the SEC to refuse to approve Bitcoin ETFs again.
“Investors should be aware – I say this in my own voice – that the underlying bitcoin cash markets do not have the robust supervision that you have in the stock market or derivatives markets,” he said. Paired with another recent SEC statement Beyond the boundaries of an ETF, Gensler’s comments could set a high bar for an ETF – one that companies cannot beat this year.
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