SEC Chair Gensler Touts New Market Rules
Commentary by Steven Lofchie
SEC Chair Gary Gensler touted recently adopted rules covering the equity markets, clearing and settlement, short selling and securities lending.
At the SIFMA 2024 Annual Meeting, Mr. Gensler reflected on lessons from the GameStop events of 2021, which exposed gaps in the then existing regulatory framework. He described several key reforms since, including:
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Equity Market Structure. Mr. Gensler described updated rules on equity trading that (i) reduced the minimum quotation increment to half a penny (see related coverage); (ii) lowered the maximum fee that can be charged for access to one-tenth of a penny and (iii) updated the definition of a round lot change. He said these changes are designed to enhance competition and allow more precise pricing for investors. Mr. Gensler also touted adopted final rules to enhance disclosure requirements for order execution quality. He said that large broker-dealers—those with more than 100,000 customers— are now required to disclose execution quality to the public in a manner that "will improve transparency for execution quality and facilitate investors' ability to compare brokers, thereby enhancing competition in our markets." He noted that the SEC is still in the process of considering proposed rules on best execution, order competition and exchanges' volume-based transaction rebates and fees.
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Clearing and Settlement. Mr. Gensler highlighted the successful transition to a T+1 settlement cycle in May 2024, lowering risk and freeing up capital faster for investors. (See related coverage.) He said, "cutting the clearance and settlement cycle in half also reduces the amount of margin, or collateral, that must be placed with the clearinghouse," and he projected an "average 29 percent savings over time."
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Transparency in Short Selling. Mr. Gensler explained how new rules, which expand short sale disclosures, will make market data more accessible to regulators and the public. He said the move aims to provide clearer insights during market volatility and improve oversight. (See related coverage.)
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Securities Lending. The SEC adopted rules in the $3 trillion securities lending market that require greater data availability, previously accessible only through paid subscriptions. (See related coverage.)
On digital engagement practices, Mr. Gensler noted the agency's recent request for comment. He expressed concern over AI-driven algorithms used by brokers and advisors, which, he warned, may prioritize the platform's interests over those of investors. He said that the SEC is continuing to evaluate the potential conflicts of interest created by these predictive analytics.
Commentary
Chair Gensler generally equates more regulation with progress.
Take, for example, Mr. Gensler's comments on the new rules on short selling and securities borrowing. No doubt, these rules will result in more data. But the information provided is not "free." Instead of information that was obtainable through paid subscriptions, the government is now mandating a massively expensive information collection project to be "paid for" by all market participants. One may reasonably guess that the cost to the economy is many times higher than it was when the relevant information was paid for privately.
Further, much of the information collected is likely to be of little or no value, but that does not matter to the government since the costs of the information collection are borne by investors and market intermediaries. Unlike explicit taxes, the costs of such mandates are largely hidden from view, but they are no less real in terms of their serving as a drag on the economy. And exactly what are the benefits of the new regulations? Given the amount of information that the SEC collects already on securities trading and swaps trading, it is hard to see a benefit that remotely approaches the additional costs imposed by the SEC on others.
Is that progress?
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