May 5, 2021 - Economy

SEC chair Gary Gensler hints at tougher rules after GameStop trading mania

Photo of Gary Gensler testifying before Congress in 2013

Photo: Gary Gensler, then head of the Commodity Futures Trading Commission, in 2013. (Photo: Andrew Harrer/Bloomberg via Getty Images)

SEC chairman Gary Gensler alluded that tougher rules could be coming for players involved in the Reddit trading saga earlier this year, according to remarks released ahead of a congressional hearing scheduled for Thursday.

Why it matters: They're his "most revealing comments so far" on the issue since being confirmed to head the regulatory agency, Bloomberg notes.

Catch up quick: Gensler will testify in the upcoming congressional hearing related to the trading frenzy earlier this year.

  • The heads of clearinghouse DTCC and the Financial Industry Regulatory Authority will also testify — both speaking out publicly on the issue for the first time.

What they're saying: "Many of our regulations were largely written before these recent technologies and communication practices became prevalent ... we may find that we need to freshen up our rule set," Gensler plans to tell the House Financial Services Committee on Thursday.

  • He was referring to trading apps like Robinhood's game-like features that may entice investors to trade more.

Details: Gensler plans to address a number of practices thrust into the limelight on the back of the GameStop mania.

  • On payment for order flow — i.e. when market-makers like Citadel Securities pay companies like Robinhood to fulfill stock trades sent their way: "Many Robinhood customers shouldered the costs of inferior executions; these costs might have exceeded any savings they might have thought they’d gotten from a zero commission."
  • On trade settlement — or the time it takes for trades to clear after they are made (currently two days after the trade happens): "We now have the technology to further shorten the settlement cycles ... even to same-day settlement ... I believe shortening the standard settlement cycle could reduce costs and risks in our markets."
    • He added the SEC is putting together a draft proposal for review.
  • On social media and trading: "I’m not concerned about regular investors exercising their free speech online. I am more concerned about bad actors potentially taking advantage of influential platforms."
  • Gensler plans to say SEC staff is examining whether Robinhood is "adequately disclosing their policies and procedures around potential trading restrictions" and whether "margin requirements and other payment requirements are sufficient."

Worth noting: Gensler's prepared remarks mention Archegos, the family office that blew up after using an instrument called swaps to place huge bets on stocks with little upfront cash.

  • Gensler notes SEC staff is possibly considering more reporting rules for swaps, as well as greater disclosure of short-selling.

The other side: "We look forward to engaging with the SEC as they consider potential rules in these areas," Robinhood's head of public policy communications Jacqueline Ortiz Ramsay tells Axios.

The bottom line: The Reddit hype may have died down (see: poster meme stock GameStop, down 54% from its peak in January) — but regulators want to figure out what, if anything, should change as a result.

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