Gary Gensler
Chip Somodevilla/Getty ImagesGary Gensler, the chairman of the Securities and Exchange Commission, said on Wednesday that the agency was taking a closer look at some of the hottest trends in investing — SPACs and retail trading apps — out of concern that smaller investors are getting a raw deal.
Gensler has not specified what exactly the SEC will change about the current dynamics in the market, but he has repeatedly said that zero commission trading at online brokerages has costs that aren’t obvious. “It’s not free,” he said on Bloomberg television before the market opened on Wednesday.
Newer apps such as Robinhood and Webull, as well as more established brokers like Charles Schwab (ticker: SCHW), route customer orders to market makers that execute the trades. Those market-makers profit off the difference between the bid and ask, and send a portion of the profit back to the broker. Gensler thinks the costs of those deals are hidden from customers, and create conflicts of interest.
“There’s an inherent conflict that even if it’s a penny, or two pennies, or some small fraction, that’s trading off against you, the retail public,” he said.
“Now what can we do about it? We’re going to take a look at the whole equity market structure, the stock market,” he added. He noted that other countries, including the U.K., Canada, and Australia have banned payment for order flow. “And so we’re going to take a look closely at that.”
Gensler also seems concerned that so many orders are now routed to dark pools, instead of more regulated and transparent venues like the New York Stock Exchange or Nasdaq. “That segmentation matters to us and the public,” he said.
Matt Kulkin, a lawyer at Steptoe & Johnson who advises clients on regulatory issues, said in an interview earlier this month that he thinks Gensler will try to change the market dynamics that now govern how retail orders are routed. An increasing proportion of trading is occurring in dark pools, and a small group of firms has an outsize role in the process. Gensler previously dealt with a similar issue when he was the chairman of the Commodity Futures Trading Commission under President Obama, Kulkin noted. At the CFTC, Gensler moved the trading of swaps — derivative products that he blamed for exacerbating the 2008 financial crisis –onto more tightly-regulated and transparent venues.
Kulkin, himself a former division director at the CFTC, expects Gensler to take a similar approach to the payment for order flow issue.
“I think he’s trying to push concentration back onto exchanges,” Kulkin said. “And he’s also trying to address what he calls the segmentation — that there’s a relatively small number of market participants serving a large part of the market. This is the same dynamic he faced in the swaps market, when he took over the CFTC. There were a handful of large dealer banks that were largely providing prices to the whole market to all commercial companies that needed to hedge risk.”
Gensler also talked about SPACs, or special purpose acquisition companies. SPACs have been around for years, but have taken off over the past year. They give private companies another way of going public, through a merger with a shell company guided by a sponsor. Gensler’s concern with SPACs is that the sponsor and large institutions may get a better deal than retail investors.
“It’s really making sure that the sponsor who’s behind that is fully disclosing their take on it,” he said. “These are very expensive, dilutive products. I mean, the sponsors take out a chunk at the beginning, then there’s more being taken out later when they merge with a private company in what’s called a de-SPAC. I just call that a target IPO. And it’s those disclosures — ensuring that the retail investors get the right disclosures and are protected and somebody is not misleading them, and secondarily that they’re participating just like the institutional investors. A lot of the big institutions buy into these SPACs later during that target IPO. And they do so at a preferred price rather than the price the retail public’s getting.”
Gensler also said that the SEC is looking at other ways to add transparency to markets, including by shortening the amount of time investors have before they must disclose large stakes in companies. Now, they have 10 days before having to say that they’ve taken a 5% stake in a company and want to exert control, for instance. “Shouldn’t the whole market know if somebody has tripped that 5% wire?” he asked.
More disclosure could be coming on company buybacks, too, Gensler added.
Write to avi.salzman@barrons.com
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June 23, 2021 at 10:01PM
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Gary Gensler Says SEC Is Focusing on SPACs and Retail Trading Apps - Barron's
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