Gensler Targets Broker ‘Gamification’ After Trading Tumult
(Bloomberg) -- Gary Gensler pledged to scrutinize trading apps that have exploded in popularity, signaling the Biden administration’s pick to lead the U.S. Securities and Exchange Commission plans to confront issues central to wild stock swings that have shocked Wall Street and Capitol Hill.
Gensler, testifying during a Tuesday confirmation hearing before the Senate Banking Committee, said a top concern is that upstart technologies are prompting less sophisticated investors to take risks that they don’t fully understand. Without naming Robinhood Markets, his comments seemed squarely aimed at the Silicon Valley brokerage that has brought a legion of new traders to the stock market.
“Technology has provided greater access, but it also raises interesting questions,” Gensler told lawmakers. “What does it mean when balloons and confetti are dropping and you have behavioral prompts to get investors to do more transactions?”
An SEC review, Gensler said, would include such “gamification,” as well as the controversial practice of brokers selling customer orders to Citadel Securities and other trading firms. While that revenue has been used by online brokerages such as Robinhood to offer commission-free trades, lawmakers are increasingly questioning whether hidden conflicts are preventing investors from getting the best deal.
Both topics have gained attention in Congress after January’s trading spikes in GameStop Corp., and they continued to be a focus at Tuesday’s hearing. Gensler testified along with Rohit Chopra, President Joe Biden’s choice to run the Consumer Financial Protection Bureau.
The nominees are strongly supported by progressives and are likely to win confirmation in the Democratic-led Senate. Democrats on the banking panel said they were looking forward to Gensler and Chopra re-energizing financial oversight after four years of rule-cutting during the Trump administration. They highlighted the need for action in areas like climate change and corporate diversity, as well as tougher sanctions for wrongdoing.
Senate Banking Chairman Sherrod Brown of Ohio urged the two to “fight for all the workers and families and communities that have been left out and looked down on by the Washington elite, and preyed on by Wall Street.”
Republicans on the panel were skeptical about both nominees, and warned them not to stray into anti-business activism.
Senator Pat Toomey of Pennsylvania said he was particularly concerned about Chopra leading the CFPB, which he called “arguably the most unaccountable agency in the history of the federal government.” Toomey also told Gensler to make sure he doesn’t use the securities laws “to advance a liberal social agenda” at the SEC.
Still, much of the discussion at the hearing revolved around the tumult for GameStop and other stocks that day traders have banded together to hype on social media. The episode has fueled concerns over the fairness of markets and whether share prices detached from reality pose a threat to financial stability.
The SEC has been investigating the frenzy, looking into potential market manipulation and whether any policy changes may be needed. Gensler said that would continue if he takes the helm of the regulator.
“Technologies change and markets change but we should always evaluate new changes,” Gensler said. Specifically on brokers’ selling their customers’ orders to trading firms, Gensler said it is “important to look at it economically and look at whether investors are getting best execution.”
A former Commodity Futures Trading Commission chief who made a fortune several decades ago at Goldman Sachs Group Inc., Gensler said he would examine whether the SEC should require more corporate disclosures about climate change, political contributions and minority board representation. He said, “we will look at what information investors want” in these areas.
Gensler also told the committee he had not studied the need for a federal tax on stock transactions, which is being pushed by some Democrats to raise revenue and to curb speculative buying and selling by high-frequency trading firms. Wall Street has come out aggressively against the levy, arguing it would just be passed on to retail investors.
On digital tokens, Gensler said he believes in Blockchain technology but stressed that the SEC must to be vigilant to protect investors in cryptocurrencies. It’s important “to ensure that these markets are free of fraud and manipulation,” he said. Bitcoin slipped to its lowest levels of the day after Gensler’s comments.
Chopra, a member of the Federal Trade Commission who previously helped Senator Elizabeth Warren set up the CFPB, said he would prioritize protecting student, military and minority borrowers. Chopra repeatedly took fire from Republicans, who questioned him about FTC enforcement actions he voted against because he believed the penalties imposed on firms were too low.
“I do have a problem when fraudsters get off with not having to redress their victims,” Chopra responded. “We are sometimes not doing enough to hold businesses accountable when it comes to the harm that they cause.”
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