Yesterday, for the first time as Chair of the Securities and Exchange Commission, Gary Gensler appeared before Congress to provide testimony regarding the market disruptions and volatility witnessed in January 2021 relating to GameStop and other securities. Chair Gensler identified seven factors contributing to market volatility: gamification and user experience; payment for order flow; equity market structure issues; short selling; social media; clearance and settlement (or “market plumbing”) issues; and system-wide risks. Chair Gensler noted that the SEC Staff expects to publish a staff report on these issues. He also noted that he has asked the SEC Staff to prepare a request for public input on gamification related issues, including how current rules apply in light of the development of new technologies, and this will facilitate an evaluation of existing rules for possible amendment. Chair Gensler posed a number of questions regarding payment for order flow: “Do broker-dealers have inherent conflicts of interest? If so, are customers getting best execution in the context of that conflict? Are broker-dealers incentivized to encourage customers to trade more frequently than is in those customers’ best interest? What are the policy implications with regard to the data aggregated by the purchasers of order flow?”
The Chair also commented on the Archegos Capital matter. In that respect, he noted that Congress had given the SEC rulemaking authority to extend beneficial ownership reporting requirements to total return swaps and other security-based swaps. Chair Gensler noted that he has asked the SEC Staff to consider recommendations as to whether to include total return swaps and other security-based swaps under new disclosure requirements, and if so how.
He also noted that Congress had directed the SEC under the Dodd-Frank Act to publish rules on monthly aggregate short sale disclosures. In addition, the Dodd-Frank Act had provided authority to the SEC to increase transparency in the stock loan market. The Chair has directed SEC Staff to prepare recommendations for the SEC’s consideration on these issues as well.
Chair Gensler commented on social media and the potential for bad actors to take advantage of social media platforms, as well as the use of sentiment analysis to manipulate the market. He noted the need to understand these algorithms and trading strategies better. He also addressed risks arising due to clearing, settlement, and the trading cycle.
See the full text of his remarks.