Securities and Exchange Commission (“SEC”) Chair Gary Gensler returns to testify before the House Financial Services Committee this Tuesday for his first oversight hearing since a GameStop hearing nearly two years ago, and just four months after his release of a controversial 1600+ pages of four equity market structure overhaul proposals.
Despite the partisanship that may arise on topics such as ESG, and potentially crypto regulation, there is one area where Democrats and Republicans will likely find consensus: the need to ensure that the equity markets are working well for everyday investors. More than half of U.S. households are invested in the stock market, either directly or indirectly through a 529 plan, 401(k), a corporate or public pension plan, or ABLE plan. Whether it is saving for college, retirement, or for financial independence and creation of generational wealth, there is broad bipartisan agreement that the U.S equity markets function fairly and as intended for everyday investors.
To achieve that goal, lawmakers should strongly consider these four bipartisan areas of discussion on equity market structure:
- U.S. Equity Markets Are the Envy of the World. There has never been a more low-cost or more liquid market to be an everyday investor than right now in the U.S. Chair Gensler has himself characterized the U.S. equity markets as the “gold standard of the world’s capital markets”; and indeed the U.S. equity markets are the most low-cost in history, with bid ask spreads coming down from 50 or 60 basis points at the turn of the century, to a basis point or less now on many stocks, reducing the cost of trading. As a result of automated trading technology, investors have 30% more in lifetime savings as a result of the low-cost trading and market automation.
- Any Changes Should Proceed With Incremental, Rather than Wholescale, Review. Although the U.S. equity markets are the best ever for retail and institutional investors, there is always room for review and improvement. Chair Gensler has proposed four equity market proposals that each would fundamentally impact equity market structure. Public comment letters show broad industry consensus around proceeding incrementally to any changes, to avoid unknown and potentially damaging consequences to equity market structure of invoking too much change, all at once, on an interconnected ecosystem. Any proposed changes to equity market structure that is working well should be proceeded with carefully to avoid negative and unexpected consequences. As Rep. Ritchie Torres (D-NY) has noted in an April 4 letter to SEC Chair Gensler, among Gensler’s proposed changes are “untested and may go too far by (directly or indirectly) making our markets less efficient, increasing costs to invest, and causing some individual investors to exit the stock market altogether.”
- Need for Public-Private Information-Sharing to Keep Pace With Emerging Technologies. As new technologies emerge and change the face of finance, how do regulators continue to strive for public policy goals to ensure the markets are functioning optimally for everyday investors? Examples of emerging technologies include the rise of artificial intelligence (AI) as a tool for investors, the rise of regtech technology for compliance and the mainstreaming of high frequency trading technologies to everyday investors. The SEC should invite information-sharing from the public and innovators in fintech, convene further roundtables, discussions, and public-private information sharing to make sure that regulators are keeping up with emerging technologies.
- Importance of Financial Literacy and Public Education – Looking back at the GameStop hearing almost two years ago, the amount of retail investor participation has remained high at 20 percent of overall trading volume, up from a baseline closer to 10 percent a decade ago. With investors continuing to “buy into the dips”, and automated trading technology mainstreamed so that investors can trade from their iPads and phones at historic low-costs, it is vital that financial literacy initiatives continue to be promoted. The SEC has launched its April “Investing for Everyone” financial literacy initiative, a good first step in promoting free tools and resources at the SEC’s site Investor.gov.
The equity markets of the United States are the envy of the world, and certainly there is room for additional improvement. But by adhering to an evidence-based review, including the topics discussed here, change should be bipartisan, positive and perhaps most importantly, avoid regulatory overreach that risks turning back the clock on the tremendous improvements over the past 20 years that have made today’s modern markets truly an effective resource for the everyday investor.
