Fintechs, There’s a New Cop on the Beat

SEC Chair Gary Gensler
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Gary Gensler has been on the job for just three weeks, but the new head of the Securities and Exchange Commission (SEC) has already unveiled a big agenda aimed at fintech companies, with issues ranging from recent stock market frenzies to cryptocurrency regulation on the list.

In a House Committee on Financial Services hearing Thursday to discuss the extreme volatility in certain stocks that began in late January, Gensler said the SEC is reviewing the events and expects to release a report on its findings this summer. He said the SEC is looking for any violations and would consider whether government action is necessary.

Thursday’s hearing was the third on the topic of market volatility, which drew the attention of the public and regulators alike as they watched the spectacle of certain so-called meme stocks, like GameStop and AMC, skyrocketing and then plunging repeatedly. The frenzy spread to shares of other companies, causing extreme volatility and triggering margin calls. Some brokerage firms, including Robinhood, Charles Schwab, and TD Ameritrade, were forced to restrict trading, shutting out individual investors at a time when specific stocks were making huge moves in one direction or the other.

GameStop shares, for example, spiked to $480 from $20 and then tumbled again to $40 within weeks, after traders banded together on the social media platform Reddit to create a short squeeze. They successfully forced hedge funds that were holding massive short positions in GameStop to purchase shares to cover those positions. That drove up the price of GameStop stock, but the shares then fell again as traders took profits.

The hearing on Thursday and the two previous hearings were focused on possible remedies to prevent such an event from happening again.

The SEC is investigating social media manipulation of the stock market and short selling, and also looking at other issues, including gamification and user experience on trading apps like Robinhood that encourage constant trading; payment for order flow, or funneling customer orders to certain firms for a fee (which is how brokers are able to make money without charging traders any commissions); transparency of positions; and how long it takes for trades to settle.

But the new chairman, who previously taught blockchain technology and held fintech-related positions at MIT, said that the real problems are bigger than Robinhood or Reddit or GameStop.

“I think these events are part of a larger story about the intersection of finance and technology,” he said in his prepared testimony. “Our central question is this: When new technologies come along and change the face of finance, how do we continue to achieve our core public policy goals and ensure that markets work for everyday investors?”

In addition to addressing stock market volatility, Gensler is interested in cryptocurrency regulation, although he said that only Congress has the power to engage in regulatory oversight.

“It’d be good to consider whether to bring greater investor protection to the crypto exchanges,” he said. “Right now, the exchanges trading in these crypto assets do not have a regulatory framework either at the SEC or our sister agency, the Commodities Future Trading Commission. That could instill greater confidence. Right now, there’s not a market regulator around these crypto exchanges. And thus, there’s really not protection against fraud or manipulation.”