The table is finally set on Capitol Hill with the drawn-out election process resulting in a divided Congress. But there is one issue that impacts tens of millions of Americans that doesn’t rest with the question of which party controls the House or Senate – and that is the bi-partisan matter of preserving and protecting the integrity and stability of our nation’s financial markets.
More than half of all Americans invest in the stock market in one manner or another for retirement and life’s other financial milestones – through 401(k) plans, IRAs, corporate and public pension programs and ABLE programs. For these investors, returns are not measured by political party but by the financial balance in their monthly account statements.
As the new Congress gears up to convene in January, policy makers of all political persuasions should quickly come together to support these imperatives to preserve the vital foundational underpinnings of the U.S. markets:
- Preserve What is Working Well in Capital Markets. As Securities and Exchange Commission Chair Gary Gensler formulates market structure proposals for roll-out later this year or early next – lawmakers should include in their oversight hearings of regulators a discussion of what is working well for investors. Investors have the best markets in decades as far as bid-ask spreads (the lowest in history) and dependable liquidity. A full rewriting of equity market structure, potentially turning back improvements in price discovery for investors, should be avoided. Stock prices will rise and fall as they did in 2022 – but the markets operated as intended. No flash crashes, no major exchange outages – nothing to compare to the old days, as in the 1987 crash, when stockbrokers didn’t answer their phones in a falling market. Market structure can always be fine-tuned and improved, but a wholesale regulatory recasting, with potential negative consequences on market competition and the cost of trading, and choosing winners and losers among participants, is unwarranted.
- Take Action on “Enron Moment'' of Crypto to Establish Federal Regulatory Framework. The stunning reversal of fortune of the most famous individual in crypto trading, Sam Bankman-Fried, has become an “Enron moment” for crypto. Recent revelations include FTX’s alleged mishandling of customer accounts, questionable accounting and auditing practices, potential commingling of funds, and possible fraud. That should be a wakeup call to Congress to work on bipartisan legislation to ensure a regulatory framework for the digital assets market. Clarification is needed on whether the SEC, CFTC, or other regulators have jurisdiction, a process that can start in earnest this week when the Senate Agriculture Committee holds a hearing on FTX featuring CFTC Commissioner Behnam. It is important that Congress establish an appropriate budget mechanism for this new regulatory burden. Currently, the SEC’s ad-hoc oversight of crypto trading is subsidized by fees collected on equities and options trades, known as Section 31 transaction fees – this is hardly appropriate.
- Reauthorize the Task Force on Financial Technology and Artificial Intelligence– In the year ahead, it is likely that AI will increasingly be used as a tool for human traders to find more efficient means of compliance, risk management and for potentially improving trading strategies in the future. As of 2022, the global AI market was $136 billion and is expected to grow by 13x by the end of this decade. In past Congressional sessions, the Task Force on Financial Technology and Artificial Intelligence has operated in a bipartisan fashion to provide a venue for lawmakers to educate themselves on how AI - as well as fintech, and algo trading - is used by industry participants, and how AI may be used to maintain the competitiveness and fairness of America’s financial sector. The incoming 118th Congress should re-authorize this Task Force.
- Recognize the Beneficial Role of Automated Traders in Helping Maintain Fair and Orderly Markets - As Congressional staff educate themselves on market structure, in light of upcoming potential proposals for market structure overhaul from the SEC, it is worth reviewing a 2022 report on equity market structure. Automated traders confer a benefit to investors, whether individual, buy side or sell side, helping save money and increase returns over the long term. Despite the high volatility of 2022, investors had dependable liquidity to buy and sell stocks thanks to electronic market makers, or automated traders, who infused liquidity into the markets, even when others were afraid to trade during a sell-off. The SEC’s recently - and future - proposed rules should be reviewed in this context and changes that could do harm to automated trading and therefore liquidity in the markets should be avoided. Congress should question the SEC’s rulemaking in these areas.
The importance of safety and soundness of our nation’s financial markets doesn’t differ by red state or blue state. If there ever was a bi-partisan issue, it’s secure savings and investment for Americans of all income classes.