Gary Gensler’s over-regulation would sink “memes” markets

BEVERLY HILLS, Calif .– Gary Gensler and fellow Democrats at the Securities and Exchange Commission will try to sell their long-awaited report on the “memes shares” trading frenzy as a clear call for more regulation.

But if you remove the propaganda from the report, it shows that our markets are doing pretty well. Best of all, small investors have never been more protected from abuse than they are today.

Of course, the Biden administration doesn’t want you to see the half-full glass version of the commercial madness that happened earlier in the year. They want you to think that something is wrong with the plumbing of the markets – and small investors need to be protected – since, for a few days, a handful of stocks hit sky-highs for no other apparent reason that people took. pleasure to bid them up.

Yes, the increase in shares of GameStop, a has-been video game retailer, or shaky movie theater chain AMC Entertainment, was odd. Penny stocks traded like Amazon or Apple are a sign that the madness of the crowds has taken hold.

Don’t blame the markets or even Robinhood, the no-cost trading app that made the frenzy easier. Blame the Fed.

The incentive for the stock game comes from zero percent interest rates and endless quantitative easing – the fancy term for the Fed flooding the area with liquidity. The perfect conditions for people to trade stocks as they roll the dice in Vegas.

But Gensler, the chairman of the SEC, and his Dem cohorts would rather turn the meme show into something it’s not – a scandal that forces change. Word from Washington that caught on to financial titans attending the Milken Institute’s world conference in California last week is that Gensler will use this recount to ban practices such as payment for order flow, and possibly force all of them. transactions to be carried out on public stock markets. instead of over-the-counter locations.

Why? For Gensler, it’s a question of ambition. He wants to regulate everything from cryptos to market structure because he eventually wants to be appointed Secretary of the Treasury. The idea is to show that he’s tough on Wall Street.

A GameStop store in Jackson Heights, New York.
The Biden administration panicked over the surge in GameStop actions led by online trolls.
REUTERS / Nick Zieminski / File

For the Biden administration, this is a good way to score class war points as we approach midterm. And their list of “bad guys” begins with Robinhood, the no-cost brokerage app used by investors to trade those memes stocks. Its sin, according to the report: making trading fun with its easy-to-use app that harnesses the masses’ penchant for gambling rather than investing.

Others on the target list: Citadel Securities and Virtu Financial, market makers who made a ton of money helping Robinhood run the alleged casino, according to the report.

They did this through a so-called Order Flow payment. Robinhood is free for users because it sells its orders to these market makers. Citadel and Virtu then matched the buyers and sellers of the meme shares and skimmed off some interesting charges on the bid-ask spreads. This club of Robinhood, Citadel and Virtu could have secret deals which are detrimental to the little guy; investors might not pay commissions, but they might lose money on the execution of market makers.

Worse yet, much of this activity has been conducted through what the report calls “over-the-counter market makers” and places derisively referred to as “dark pools”. They are dark and supposedly sinister because these markets do not publicly publish their prices and are used by financial elites to possibly deceive people, the report suggests.

Yet on closer inspection, Dark Pools aren’t all that grim, the report also shows, especially given the system they replaced.

Gensler would like to go back to the good old days when the vast majority of market action occurred on the NYSE or Nasdaq floor in public view with fewer possibilities for alleged corruption.

But the NYSE’s market-making history is hardly free from small investor scams. Meanwhile, over-the-counter trading is heavily regulated – like everything else on Wall Street. Brokers are mandated to provide best execution, which is why they look to over-the-counter platforms. Investor orders are generally executed at better prices than on public exchanges for a number of reasons. Brokers can transfer orders to competing sites at a lower cost for small investors.

Do not believe me. Just read the report, which points out that the vast majority of GameStop’s stock market performance during the frenzy happened outside of the NYSE or Nasdaq with no mention of small investors being duped.

People go to the AMC Theater on W42nd Street in New York, NY, March 6, 2021.
AMC Entertainment shares soared as theaters were still closed thanks to users of the Robinhood app carelessly trading with the help of zero percent interest rates from the Fed.
Christophe Sadowski

Now take the findings from the Order Flow Payment report. “These payments can create a conflict of interest,” the report says. I’m sure they can but they didn’t. How can I know? The report did not mention that small investors were getting hosed. Considering Gensler’s vast ambitions, if Citadel were to fuck Robinhood customers, we would all know by now.

Yes, there were hiccups during the memes madness – Robinhood couldn’t handle the order volume and stopped trading the shares. A hedge fund almost went bankrupt and was partly bailed out by Citadel.

But the system worked, which is evident when you read Gensler’s agitprop and focus on his actual findings.

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