By Dennis Kelleher, Co-founder, President and CEO of Better Markets
It’s been a busy few weeks for Better Markets with the ongoing GameStop phenomena, the growing interest in SPACs, the anticipation of confirmation for key leadership positions at our regulatory agencies and our day-to-day efforts advocating for a fairer financial and economic system for all Americans.
I also did my first Ask Me Anything on Reddit in late March. I enjoyed the experience and was glad to see so many comments (nearly 1,300) and upvotes (more than 17,000). Below you’ll find the first of two blog posts that feature a recap of my answers to many of your questions. You’ll also find links to related videos, articles, fact sheets, graphs and a white paper.
Thanks to all of you who asked me such good questions — I only wish I could have answered them all!
CousieKnow asked: What was your first reaction to find out about the editing done to the [House Financial Service Committee GameStop] hearing upon release by the media?
My answer: Well, first, thanks to the Redditor who spotted it and brought it to everyone’s attention. I wasn’t surprised. As I said in a press release that we put out on this, CNBC is one-sided pro-Citadel and most of Wall Street. We did find it odd that they would do it to a video of a Congressional hearing, but they know their audience and don’t like to offend/disappoint big finance.
M4NOOB asked: Why was the hearing so focused on payment for order flow and other topics when there is insane market manipulation and illegal tactics going on?
The focus on PFOF was because of the $680 million in PFOF Robinhood received in 2020 alone for selling its retail orders to dealers in the dark markets like Citadel. This inevitably creates conflicts of interest where retail traders get ripped off in rigged markets. But you are right that there are a lot of other issues, some of which we called for investigations by the SEC and DOJ into the conduct of all the financial firms here.
We also addressed a number of other issues in our written testimony, including market manipulation, capital and liquidity, the need for Consolidated Audit Train (CAT), etc., and it’s why we called for a series of Congressional hearings. Thankfully, House Financial Service Committee Chair Maxine Waters is doing that and standing up to the power, might and influence of Wall Street. Here’s my written testimony FYI.
Spaceminion asked: Do you believe market makers, such as Citadel and Virtu, are provided insider information or unfair market advantage as it relates to retail brokerage positions held due to buy/sell volume provided to them which are currently not disclosed via SEC forms such as 13Fs? For example, if Citadel sees the full market demand and execution of retail investors in GME, then they can determine what remaining sell volume will be needed to reduce retail investor holding.
My answer: You are definitely right. No one has more info about not only where the market is at this moment, but also where it is going due to the massive amount of flow going into those HFT firms like Citadel, Virtu, etc. They have unique information from those orders/flow and have a unique ability to exploit it. Front running is illegal, but it’s incredibly difficult to prove and that is all the more so when it might be done by an algorithm. The only way for the regulators and prosecutors to determine
this is for them to deconstruct the algos and source codes – that’ll ensure that there is no front running, that the walls preventing conflicts and the other purported compliance mechanisms really work…..or not. Read the Reddit comments.
j__walla asked: Why is the SEC just letting Citadel and friends crash the market? Why aren’t they being held accountable for their poor choices?
My answer: The biggest problem with the Citadels of the world is that they are unregulated in critical respects and are allowed to operate with little transparency, oversight or accountability. For example, it should be subject at least to reg SCI, but is not and the SEC has so far refused to apply reg SCI to many market participants that it should be applied to. Citadel is also at the core of the fragmentation of our markets, which operates to the disadvantage of retail investors, buy side, and the financial system. Hopefully with the new leadership coming soon some of that will change.
janedoi asked: What new leadership is coming in? To the SEC?
My answer: [President] Biden’s almost confirmed new head of the SEC is Gary Gensler, who was fantastic when he headed up the CFTC. We hope he’s going to reinvigorate the SEC, prioritize retail investors and market protection. We’re going to be pushing him to do so, and we’ll be posting here in the future to keep you informed and maybe enlist your help in the rulemaking process to push back on Wall Street where it hurts: when they are trying to bend the rules to help themselves by screwing retail!
The Flying Elbow asked: When the SEC isn’t doing its job policing the market from illegal activities, what can we the people do to bring attention to these issues? Does the SEC have formal filings we can complete and contribute to, or should we be contacting their members on twitter to make sure action is taken?
My answer: First and foremost, we need whistleblowers to come forward and report illegal conduct to the SEC. We included special provisions for this in the Dodd Frank act which has resulted in whistleblowers being awarded billions of dollars!! We detailed that in this report.
Unfortunately, Trump’s SEC enacted a rule to weaken this program because Wall Street and corporate America hates it, as we pointed out here and as we commented on here. In addition, people can report wrongdoing to the SEC directly here.
L-Lightbulb asked: What are the steps the government/ SEC can take to bring regulation/transparency to the retail investor and help them regain confidence in the system? Is there anything we can do to garner systemic change? Or are retail investors doomed to be the resource Wallstreet exploits?
My answer: Retail investors can be very powerful and have influence because they are who the SEC is supposed to exist to protect. Publicly pushing the SEC (and the Congress) can work. That’s what we do at Better Markets.
We exist to fight against Wall Street and BIG finance in the Washington policymaking process and for the buy side, retail investor, Main Street savers/retirees, etc. Because we are a nonprofit, we can be independent and oppose/call out the industry like Citadel or the big banks on Wall Street. You have to realize that a lot of money is won and lost long before the markets open because the Citadels of the world have already tilted the playing field to their advantage.
They bend the laws, rules and regulations to their benefit so that they are in the money before a single trade takes place. We’re fighting against that so that there is a transparent, level playing field. We will try in the future to let you know when there is a specific issue before the SEC that would especially benefit from retail investors and maybe enable greater participation by you to impact what they do. Read the Reddit comments.