Seven Years after Michael Lewis Described on National TV How the U.S. Stock Market Is Rigged, SEC Chair Gensler Says He’s Going to Tackle Market Structure

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by Pam Martens and Russ Martens, Wall St On Parade:

Yesterday, Gary Gensler, Chairman of the Securities and Exchange Commission, delivered a speech at the virtual Piper Sandler Global Exchange and FinTech Conference. Gensler promised to tackle at least some of the tricked-up aspects of the U.S. stock market that have rendered it the envy of organized crime, rather than the envy of the world as Wall Street titans like to delude themselves.

If Gensler actually follows through on his promise, he will be doing far more than was done by Obama’s SEC chiefs, Mary Schapiro and Mary Jo White.

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There is a precise date as to when President Obama and SEC Chair Mary Jo White became overtly aware that the stock market structure had been outrageously rigged. That date is March 30, 2014 when famed author and former Wall Street veteran, Michael Lewis, went on 60 Minutes to proclaim: “The United States stock market, the most iconic market in global capitalism, is rigged.”

When asked to explain just who it is that’s rigging the stock market, Lewis explained that it’s a “combination of these stock exchanges, the big Wall Street banks and high-frequency traders.”

Not only was nothing done by the Obama administration to stop the rigging of the market, but the rigging has actually gotten much worse with the proliferation of Wall Street banks’ Dark Pools and hedge funds taking over big chunks of stock market structure.

The appearance of Lewis on 60 Minutes was in conjunction with the release of his 2014 book, Flash Boys. The book revealed how U.S. stock exchanges are selling high speed access to trading data that the general public does not have access to by allowing high frequency trading firms and Wall Street banks to co-locate their computers alongside the computers of the stock exchange.

A reasonable person might think that the practice would have been quickly halted by the SEC. In fact, the only thing that has changed is the New York Stock Exchange has increased its fees for co-location services, which can now run into tens of thousands of dollars each month. (See the NYSE’s co-location price list for 2021. Prices begin on page 35.)

Notably, Gensler’s speech did not point the finger at the stock exchanges allowing just the richest trading houses to pay big bucks for preferential treatment and high-speed access to trading data through co-location services. Nor did Gensler indicate he thought the SEC should probe the clandestine trading practices of the Wall Street mega banks’ Dark Pools.

Gensler staked out a very narrow set of targets in his speech: payment-for-order flow, the gamification of markets and clearinghouses. (You can read his full speech here.)

If Gensler is just warming up in the bullpen, that’s one thing. But if he’s simply hoping to quiet Democrats in the Senate Banking and House Financial Services Committees (who have been holding hearings on Citadel’s payment-for-order flow and Robinhood’s gamification of markets) without ruffling the feathers of the big Wall Street banks and their Dark Pools and other market-rigging operations, then he’s going to face some uncomfortable questioning when he is called to hearings before these Committees.

Obama’s SEC Chair, Mary Jo White, previously came under a scathing critique (and rightfully so) by Senator Elizabeth Warren for a long list of failures to hold Wall Street accountable. Gensler would do well to avoid the same fate.

Gensler has already had one serious misstep. He selected a Paul Weiss law partner, Alex Young K. Oh, for his top crime chief to serve in the key role as Director of Enforcement. Wall Street On Parade published an in-depth rebuke of the selection of Oh and she was gone the same day, lasting six days on the job. (See SEC’s Gary Gensler Picks a 20-Year Wall Street Bank Defender for His Crime Chief.) It also didn’t help that Oh and Paul Weiss were sanctioned by a Judge for improper conduct in a case where they were representing Exxon Mobil against allegations of human rights violations.

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