The new Supervisor of Wall Street has outlined an aggressive regulatory priority that could narrow the profit margins of the financial industry.
Chairman of the Stock Exchange and Securities Authority (SECGary Gensler is working on tougher rules for high.speed trading companies, private equity executives, mutual funds and online stock exchanges. Retirement.The main objectives are what is said to be the profits and salaries earned beyond what a market that is only competitive would allow, the so.called economic rents.
“I hope we will address the economic burdens and try to bring them down in our capital markets,” Gensler said. He noted that the financial sector as part of the US economic product has more than doubled since the 1950s to about 8% of gross domestic product.
“If we ever go back to the level it was,” he said, “it will save a lot of money.”
This regulatory push risks jeopardizing some of Wall Street’s most lucrative business models. Some Republicans accuse Gensler of going too far. People close to the industry have said Gensler’s plans are likely to meet with opposition. But because the SEC has not made official proposals on most of its priorities, few industry representatives have been willing to speak out against it publicly.
“I do think it’s easy for anyone who enters one of these regulatory roles to become a paternalistic,” said one of the SEC’s Republican commissioners, Hester Pierce. “And so we need to beware of this tendency, because we think we know what’s best for everyone else.”
Gensler earned a reputation as a tough regulator while chairing the Commodity Futures Trading Council (CFTC) from 2009.2014. Despite legal opposition from Wall Street, he drafted dozens of rules to oversee the extensive swaps market, which previously had no regulation and was largely responsible for the 2008 economic crisis.
The SEC, a much larger agency, has been working from home since Gensler took office in April. Leading the 4,400 workers from a room in his home north of Baltimore, Gensler, 63, asked policymakers, lawyers and economists to write proposals for each of his 50 priorities.
Instead of selecting senior faculty members from the SEC or the major law firms, as many of his predecessors did, Gensler appointed key academic and policy activists from progressive lobby groups. One example is Barbara Roper, who has long supported tougher laws for stock market traders. Gensler asked her to serve as a senior advisor focusing on investor protection.
Perhaps the biggest battle Gensler has entered into concerns the “pipeline” of the stock market, an area in which a few large individual companies carry out most of the trading activities of private traders.
As part of an arrangement recognized as payment for order inflows, exchanges like Robin Hood send orders from many clients to fast trading companies like Citadel Securitirs or Virtu Financial instead of a regular exchange. The fast.trading companies pay the stock exchanges for their orders and their profit lies in the difference between the selling and buying prices of the shares traded through them.
In the past, the SEC has approved this practice, which has been in place for several decades, because it has allowed many brokers to stop charging commissions from private traders in recent years. Citadel and Virtu say that they trade at a slightly better price than the stock exchanges, which saves investors extra money.
“Concerns about concentration and conflict are theoretical,” said Douglas Sifu, CEO of Virtu.
But Gansler and other critics say the payment for placing orders places a conflict of interest for brokers and reduces market transparency because it channels data out of the eyes of stock exchanges. In August, he said he was open to the idea of banning the practice altogether, a remark that caused shares of Robin Hood and Virtu to plummet.
“You have some great players here whose entire business model in the securities field is based on the current model,” said Chris Yakobela, who worked with Gensler at the CFTC and is currently the director of a trade association representing regional exchanges. “They’re going to do everything they can to not change their business model.”
Gensler is also looking at the new generation of stock exchanges like Robin Hood. Instead of human brokers receiving instructions from clients and recommending investments over the phone, these exchanges use data analytics to see how clients behave. Their algorithms can tailor messages to private clients and influence investment decisions through phone alerts and other features.
“While these developments … can increase access, increase choice and lower costs, they also raise new questions about potential conflicts, data biases and, even, systemic risk,” Gensler told the Senate Committee on Banks in September.
Robin Hood Announced that it expects to work with the SEC and that its platform has made the stock market accessible to millions of people investing in the stock market for the first time.
Gansler also mentioned plans to ask for more information from fund managers offering products they claim meet social or environmental responsibility requirements. Public interest in tackling issues such as climate change and racial inequality has become what is known as sustainable investment a source of increasing profits for CFOs whose commissions have fallen within a transition that took several decades by investors towards low.cost index funds.
The problem, Gensler says, is that the metrics in which the funds back up their marketing claims are not uniform, making it difficult for investors to compare.
Conservatives say some of Gensler’s plans may undermine his goal of saving money for investors. For example, rules requiring more disclosures from companies about the risks they face due to climate change may leave companies with more compliance costs, costs that companies will eventually pass on to shareholders.
As a former Goldman Sachs employee, Gensler’s skepticism about Wall Street began many decades ago. After serving in the Treasury Department of former President Bill Clinton from 1997 to 2001, he and another colleague of his, Greg Bar, co.authored a book called “The Great Trap of Mutual Funds.” In the book, people criticize investing stocks as a profession for charging high commissions and giving their investors poor returns. He urged people saving money to buy index funds instead of actively managed investments.
“Do not deceive yourself into believing that your interests are the same as those of your broker,” Gensler and Weber wrote. “In most cases … professional money management consulting simply leads investors to poor investments in the market and enriches Wall Street.”
As director of the SEC, Gensler is currently examining similar fees charged by private securities companies. While the SEC has traditionally seen large institutions like pension funds as more sophisticated entities than private investors, Gansler said these private equity investors can benefit from companies producing more disclosures to authorities.
“If private securities had lower commissions,” Gensler said, “pension funds would have received more. Today, perhaps the general partners in private securities receive slightly less.”