Here’s an unexpected pair: Jon Stewart interviewing SEC Chair Gary Gensler on his podcast, The Problem with Jon Stewart. In many ways, the interview was remarkably financially sophisticated, with acronyms like “PFOF” tossed around pretty casually, not to mention “naked shorts,” “best execution,” “dark pools” and “lit markets.” Somebody definitely did his homework.
Of course, Stewart definitely has a point of view and, to some extent, the interview was a vehicle to express it. His main theme was the absence of a level playing field in the stock market—not everyone plays by the same rules; some big players have advantages. (Of course, Gensler has previously agreed with that concept at some level, observing that one issue that deserved attention was the difference between the prices available to institutional investors and those available to retail traders. See this PubCo post.) Why wasn’t the SEC doing more about it? There was a general frustration with what the SEC was not doing. Gensler responded that, in fact, the SEC had issued numerous proposals on its agenda and even adopted some of them. Why does it take so long to get rules through, Stewart asked? Is it that the process takes just long enough for a new administration to come into power and then you don’t need to deal with it? Gensler wished he had a bigger staff and then explained that the Administrative Procedure Act prescribes the lengthy process for rulemaking; when it’s not followed—and sometimes even when it is—opponents of the rulemaking take the SEC to court, often dragging the process out even further. That happens with some frequency.
Stewart relayed an audience question about dark pools, lit markets and PFOF. Gensler explained that most retail market orders wind up, not on lit markets like Nasdaq, but rather going to wholesalers on the dark market, where there was little transparency and less competitive pricing for retail investors. In addition, as a result of “PFOF,” or “payment for order flow,” retail investors may not receive “best execution.” Doesn’t that create conflicts of interest, Stewart asked? Gensler agreed. Why isn’t there a rule to prevent this? Gensler responded that there is a rule about best execution, but it’s a FINRA rule. Then, Stewart asked, why doesn’t the SEC adopt a rule?
Stewart also raised the issue of insider trading, especially by members of Congress, and gave examples of profitable misconduct by powerful entities that end up paying relatively small penalties. Where was the accountability? Gensler did his best to explain the role of Enforcement, disgorgement and penalties, but Stewart’s concerns did not seem to be assuaged. While the SEC talks about building resilience into the system, he said, it seems that Main Street is paying the price for that resilience: the system privatizes the gain and socializes the loss. Do we need a new system?
There was lot more in the interview, which lasted for 54 minutes. An acronym bonanza you may not want to miss.