Biden’s pick for SEC flags trading app gimmicks for scrutiny

United States President Joe Biden’s choice to head the US Securities and Exchange Commission, SEC, told Congress on Tuesday that the agency should address how to protect investors who use online stock-trading platforms with flashy tech gimmicks that entice them to trade more.

Gary Gensler, who was a chair of the Commodity Futures Trading Commission, CFTC, during the Obama administration, testified by video for his confirmation hearing by the Senate Banking Committee. He was asked about the roiling stock-trading drama involving GameStop shares that has spurred clamour for tighter regulation of Wall Street. The trading frenzy in shares of the struggling video-game retailer lifted their price 1,600 per cent in January, though they later fell back to earth after days of wild price swings.

“At the core, it’s about protecting investors,” Gensler said. Among the issues to be examined, he said, is the use of “behavioural” technology in stock-trading apps.

“What does it mean when you have behavioural prompts to get investors to do more transactions? We’re going to have to study that and think about it,” Gensler told the panel.

The GameStop episode prompted lawmakers to raise concern about the business model of Robinhood, the online trading platform that hosted a wave of trading in GameStop. Critics have accused Robinhood of trying to lure young people with little or no experience trading stocks by including features on its trading platform that resemble gaming apps – like showering users’ screens with virtual confetti when they make a trade. Lawmakers have asked whether Robinhood is doing enough to communicate the risks to its users.

Robinhood offers commission-free trading, but critics say customers pay another, hidden price because Robinhood provides their data on buying and selling to Wall Street firms.

If confirmed to the SEC post, Gensler said, he would work to strengthen transparency and accountability in the markets. That will enable people “to invest with confidence and be protected from fraud and manipulation,” he said. “It means promoting efficiency and competition, so our markets operate with lower costs to companies and higher returns to investors ... . And above all, it means making sure our markets serve the needs of working families.”

Democratic senators urged Gensler to take up requiring corporations to fully disclose their climate-change risks and political spending, and punishing companies for violations of securities laws.

“That means upgrading climate-risk disclosure requirements that are out of date, punishing misconduct and enforcing the protections on the books,” said the committee chair, Senator Sherrod Brown, D-Ohio. “And it means working with other agencies – the banking regulators – to head off growing problems before they become emergencies that hurt the economy. We’ve seen what happens when markets don’t have real safeguards, and most people are left to fend for themselves – just look at the electricity market in Texas.”

Gensler has experience as a tough markets regulator during the 2008-2009 financial crisis as CFTC chair. More recently, he has been in academia. Biden’s selection of Gensler to lead the SEC signals a goal of turning the Wall Street watchdog agency towards an activist role after a deregulatory stretch during the Trump administration.

Gensler was a leader and adviser of Biden’s presidential transition team responsible for the Federal Reserve, banking issues and securities regulation. No evident opposition to his confirmation to the SEC post has emerged, and approval by the full Senate is expected.

Several Republican senators used Tuesday’s hearing, though, to argue against the imposition of new regulations in the financial markets, at the risk of stifling innovation and improperly expanding the government’s authority.

The GameStop episode has bolstered political momentum towards tighter regulation of the securities markets, though Republican lawmakers and regulators generally will oppose new rules. Possible avenues for new rules that have been raised include requiring market players to disclose short-selling positions and restricting arrangements of payment for order flow – a common practice in which Wall Street trading firms pay companies like Robinhood to send them their customers’ orders for execution.

The GameStop turbulence shows that “the SEC too often stands by while the stock market functions as a casino ... with tilted roulette tables,” said Senator Elizabeth Warren, D-Massachusetts.

As a professor of economics and management at MIT’s Sloan School of Management, Gensler has focused research and teaching on public policy as well as digital currencies and blockchain, the global running ledgers of digital currency transactions.

With a background of having worked for nearly 20 years at investment bank Goldman Sachs, a Wall Street powerhouse, Gensler surprised many by being a tough regulator of big banks as head of the CFTC.

He imposed oversight on the US$400-trillion worldwide market for the complex financial instruments that helped spark the 2008-2009 crisis. He pushed for stricter regulations that big banks and financial firms had lobbied against, and wasn’t afraid to take positions that clashed with the Obama administration.

AP