Biden’s SEC pick calls for scrutiny of trading app gimmicks

President Joe Biden’s choice to head the Securities and Exchange Commission (SEC) has told Congress 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 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 spurred clamour for tighter regulation of Wall Street. The trading frenzy in shares of the struggling video-game retailer lifted their price 1,600 percent 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 balloons and confetti-dropping 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 concerns 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 estimated 13 million users.

Vlad Tenev, CEO and co-founder of the Silicon Valley company, rejected the accusations of Robinhood’s “gamification” of trading at a recent hearing by a US House committee.

Tenev said the company merely gives people what they want in a responsible way, and that it offers educational tools for its users to learn about investing. “We don’t consider that gamification,” he said. “We know that investing is serious.”

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.”

More corporate disclosures

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 be vigilant to protect investors in cryptocurrencies. It is 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.

Tough regulator

Gensler has experience as a tough markets regulator during the 2008-2009 financial crisis as CFTC chair. More recently, he has been teaching and doing academic research in economics and management at MIT.

Biden’s selection of Gensler to lead the SEC signals an intention to turn the Wall Street watchdog agency toward 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.

Jay Clayton, a former Wall Street lawyer who headed the SEC during the Trump administration, presided over a deregulatory push to soften rules affecting Wall Street and the financial markets, as President Donald Trump pledged when he took office.