SEC chief testifies before Congress about Robinhood, GameStop Saga
New Securities and Exchange Commission Chairman Gary Gensler will testify before the House Financial Services Committee on Thursday to answer questions about his agency’s stance on the growing popularity of commission-free trading, launched by the trading app Robinhood, the dramatic boom and bust of GameStop action. earlier this year, and what new regulations are in the works to protect investors.
In one prepared testimony Released ahead of the hearing, Gensler expressed the agency’s concern over increasing “gamification” and “behavioral incentives” that encourage amateur investors to engage in frequent trading. He defined “gamification” as gaming features, such as points, rewards, leaderboards, bonuses, and competitions, designed to keep players in the game for as long as possible.
“Many of these characteristics encourage investors to trade more. Some academic studies suggest that more active trading or even day trading leads to lower returns for the average trader, ”Gensler said. “We need to make sure that investors using apps with these types of features continue to be adequately protected.”
These trading activities are most viewed on no-cost stock trading apps, such as Robinhood. Robinhood does not charge commission to its clients. Instead, he makes money by selling client stock orders to market makers, such as hedge funds, in exchange for a small margin payment on each order. The process is known as “payment for order flow” and has increasingly become an industry standard for brokers.
However, since the broker’s income depends on the number of orders he sells, there is an incentive to encourage clients to trade more often.
“Do brokers have inherent conflicts of interest?” Gensler asked in his prepared remarks. “If so, are clients getting best execution in the context of this conflict?” Are brokers encouraged to encourage clients to trade more frequently than is in the best interests of those clients? ”
The SEC is concerned about the growing prevalence of “pay-for-flow” and the dominance of some marker makers in the space. Gensler claims that around 38% of stock trading volume is now executed by these “wholesalers”. Citadel Securities, one of the largest market makers, said it performs about 47 percent of all listed retail volume in the United States.
“History and economics tell us that when markets are concentrated, the companies that have the greatest market share tend to have the ability to take advantage of that concentration,” Gensler said, “I asked the staff closely examine these issues to determine what policy approaches may be merited. “
Gensler is also expected to discuss the role of the SEC in the burgeoning cryptocurrency market and the disclosure requirements for historically opaque financial instruments, such as securities-based derivative contracts.
The hearing begins at noon Easter time and will be webcast live at House Financial Services Committee website.