“Competition and the Two SECs” Remarks Before the SIFMA Annual Meeting
Oct. 24, 2022
Thank you, Ken [Bentsen]. As is customary, I’d like to note that my views are my own, and I’m not speaking on behalf of my fellow Commissioners or the SEC staff.
1933 was an important year in SEC history.
No, I’m not referring to the passage of the first federal securities law.
I’m not actually referring to the Securities and Exchange Commission at all.
I mean the other SEC: you know, the Southeastern Conference.
I’m sure, Ken, that you could’ve guessed that, being a Texan, though I think you’ve spent more time in Houston than College Station.
Fall sports are big in the SEC. Of course, those football games happen every weekend. As a long-distance runner, I’d like to give a shout out to the SEC cross country championships taking place on Friday at Ole Miss.
The Southeastern Conference was first formed in February 1933. That was a mere three months before Congress and President Franklin Delano Roosevelt enacted the Securities Act of 1933. About a year and a half later, they set up the slightly younger SEC — the one where I’m honored to work.
A Focus on Competition
What does the SEC have to do with the SEC?
Beyond our similar abbreviations and vintages, the two SECs share one big thing in common: a focus on competition.
Though it may seem less obvious than at the Southeastern Conference, competition is central to the Securities and Exchange Commission’s remit, too.
This SEC was set up in 1934 to protect investors and act in the public interest. In 1975, largely to address fixed commissions and other anticompetitive practices by market intermediaries, Congress amended the Securities Exchange Act of 1934. Literally, they added the word “competition” to the ’34 Act — not once, not twice, but 20 times.
In 1996, Congress returned to the importance of competition. They mandated that in all of our rulemaking, the Commission must consider efficiency, competition, and capital formation, in addition to those earlier tenets of investor protection and the public interest. They didn’t just amend the ’34 Act, either. This new requirement applied to all of our foundational statutes and to rulemaking affecting all investors, issuers, and intermediaries.
Today, I’d like to zoom in on that principle of competition, and how it runs through each part of the SEC’s mission.
Why Competition Matters
Why does competition in our capital markets matter?
The SEC’s mission is to protect investors, facilitate capital formation, and maintain that which sits in the middle: fair, orderly, and efficient markets.
The whole economy benefits when there’s greater competition among investors, issuers, and the intermediaries in the middle.
Competition increases returns for investors and lowers the cost of capital for issuers. It promotes innovation and efficiency in the middle of the markets. It helps capital markets more effectively price and allocate money and risk. It helps the U.S. maintain our global competitiveness. I think Congress understood that when they amended our laws in ‘75 and ‘96.
While we have projects designed to enhance competition across all three parts of our mission — investors, issuers, and intermediaries — today I’ll primarily focus on how we can promote greater competition among the intermediaries in the middle of our markets.
The markets in the middle are almost like the neck of an hourglass. Let’s visualize that for a minute.
Imagine grains of sand flowing through the hourglass every single day. The sand, in this analogy, is money and risk.
Financial intermediaries, like market makers, exchanges, and asset managers, sit at the neck of that hourglass, collecting a few grains in each transaction. With trillions of grains flowing through daily, a few grains of sand can really add up. Those grains may potentially become excess profits above what robust market competition would provide — also known as economic rents.
Today, the financial sector — including the capital markets the SEC oversees, as well as banking and insurance — represents about 8 percent of America’s economy. That’s grown significantly since 1975, when Congress passed those amendments. At that time, the sector had less than a 5 percent share of gross domestic product (GDP).
In other words, finance has grown as a percentage of our economy despite the passage of the ’75 and ’96 amendments — not to mention the countless technological advancements that have lowered the cost of communicating and transacting elsewhere.
Centralization and Concentration
Since antiquity, finance has tended toward centralization and concentration — whether the Medici family back in the 15th century or J.P. Morgan a century ago.
There’s a tendency for central intermediaries to benefit from scale, network effects, and access to valuable data.
Though technological innovations repeatedly disrupt incumbent business models, centralization still tends to reemerge.
For example, index funds, created by Jack Bogle in the 1970s, allowed anybody to own the whole market, cheaply. Today, though, more than 80 percent of total net assets in U.S. registered investment company index funds are managed by just four asset managers.
Similarly, the internet democratized many forms of information, including in finance, and thus facilitated lower-cost brokerage. Again, however, there’s been growing centralization among equity market makers handling retail market orders, as I’ll discuss later.
We’ve even seen centralization in the crypto market, which was founded on the idea of decentralization. This field actually has significant concentration among intermediaries in the middle of the market.
Thus, we must remain vigilant to areas where concentration and potential economic rents have built up, or may do so in the future.
Faced with these natural tendencies in finance, the SEC draws upon a number of tools to fulfill Congress’s vision regarding competition. I’ll mention three such tools: transparency, access, and fair dealing.
Transparency addresses information asymmetries. It lowers some of the advantages of scale, network effects, and data as more people can see the information.
A second tool is access — importantly, not just for the biggest or most central players. Accessible markets bring in more competitors. Access increases innovation, as market participants seek new ways to compete.
Finally, there’s fair dealing — or another way to put it, a fair playing field. Those SEC cross-country athletes all will run the same distance this weekend. It’s important, as Aristotle put it, to treat like cases alike.
Races also have rules to promote integrity. The runners, for example, can’t trip their competitors.
Treating like market participants alike, and promoting market integrity, increases investor trust in the overall markets. It focuses participants’ competition on price, service, and other key factors, rather than on whether the game is fair or the information is trustworthy.
Competition and Policy Projects
Now, I’d like to discuss how we are looking to apply these tools across the fixed income, equity, and private markets.
To begin, let me turn to the $55 trillion fixed income markets, and in particular our suite of projects designed to instill greater competition and resiliency in the $24 trillion Treasury market.
First, we’ve proposed to require that all market participants that engage in important liquidity-providing roles, including in the Treasury market, register as dealers.
We’ve also proposed that significant Treasury market platforms, including interdealer brokers, come into compliance with Regulation ATS.
Why should other firms have to register while some firms currently don’t?
Third, we’ve proposed broadening central clearing in both the cash and repurchase agreement (repo) markets for Treasuries. Central clearing lowers risk in the system and increases access to more counterparties.
Fourth, we also have proposed three key reforms to better facilitate customer clearing in Treasuries. Such increased accessibility, along with the proposed broadening of central clearing in U.S. Treasury markets, would help promote anonymized all-to-all trading, improving competition and resiliency.
Last, I also support consideration of work undertaken by the Financial Industry Regulatory Authority (FINRA) to bring greater post-trade transparency to both the Treasury market and the nearly $30 trillion non-Treasury fixed income markets.
Next, let me turn to the equity markets.
We’ve made real progress since the days of fixed commissions back in 1975. While some might say that retail investors have never had it better, make no mistake: There are still a lot of costs in equity market trading. Zero commission doesn’t mean zero cost.
An important segment of the equity market — where most retail market orders are executed — is off-exchange and tending toward centralization.
Today, retail market orders generally are not sent to lit exchanges, where buy and sell orders compete and can be matched. Instead, a significant portion of retail orders are sent to just a few large wholesalers. As a result, retail investors may not be getting the best prices possible.
Thus, I’ve asked staff to make recommendations for the Commission’s consideration, using the available tools, around how to enhance competition in the equity markets. We haven’t updated key aspects of our national market system rules, particularly related to order handling and execution, since 2005.
One area we’re exploring is how to level the playing field between the dark market and the lit market.
Particularly, I’ve asked staff to explore the possibility of harmonizing the tick size across different market centers, whether a quote or trade is on-exchange or off-exchange.
In addition, I’ve asked them to make recommendations for the Commission’s consideration around a potential SEC-level Best Execution rule. I’ve also sought recommendations around how to instill greater competition for retail market orders on an order-by-order basis, through auctions. With greater competition, more market participants would have access to these retail market orders.
I’ve also asked staff for recommendations around lowering the maximum fees exchanges can charge for access to protected quotes. Further, I’ve asked them to make recommendations around how we might update Rule 605 so that investors receive more useful disclosure about order execution quality.
Private fund advisers
Finally, let me turn to private fund advisers. Private funds hold approximately $21 trillion in gross assets. Given its relative growth, soon, this sector may surpass the U.S. commercial banking sector ($23 trillion) in size.
Private fund advisers, through the funds they manage, touch so much of our economy. Often, private fund investors are retirement plans and endowments. The people behind those entities often are teachers, firefighters, municipal workers, students, and professors. On the other side, the people raising money from private funds might be startup entrepreneurs, small business owners, or the managers of late-stage companies.
Given that these funds touch so much of our economy, efficiency and competition among these intermediaries is important.
That’s why I supported our recent proposal to require registered private fund advisers to provide detailed reporting to investors of fees, expenses, performance, and preferential treatment, such as side letters. More competition and transparency could potentially bring greater efficiencies to this important part of the capital markets.
In sum, these projects are designed to lower the cost to issuers and raise the returns for investors, using the tools of transparency, access, and fair dealing to promote greater competition.
I discussed a few of our projects related to enhancing competition, but Congress’ mandate on competition touches upon all of our work promoting our three-part mission.
I note that Congress’s various mandates for the SEC to consider competition and efficiency didn’t cabin our approach only to retail investors or only to one segment of our markets. They didn’t leave out so-called sophisticated investors. I think they understood that our whole economy benefits when we drive greater competition throughout the capital markets, whether private fund advisers, the Treasury market, the equity market, or elsewhere.
I get that intermediaries, who make up a lot of the SIFMA membership, naturally would have questions and comments on policies designed to promote greater competition in our financial markets. We benefit from your feedback and input on our proposals.
Effectively, though, Congress directed us to have you all compete to benefit the public. Our clients are the 330 million people in our great nation. Americans benefit from more competition and efficiency in our markets.
Ultimately, I hope that competition is something we all can stand behind. I’m sure our friends at the other SEC would agree.
 See Securities Acts Amendments of 1975, available at https://www.govtrack.us/congress/bills/94/s249. Five objectives laid out by Congress in 11A of the Exchange Act (15 U.S.C. 78k-1): (1) economically efficient execution of securities transactions; (2) fair competition among brokers and dealers, among exchange markets, and between exchange markets and markets other than exchange markets; (3) the availability to brokers, dealers, and investors of information with respect to quotations and transactions in securities; (4) the practicability of brokers executing investors’ orders in the best market; and (5) an opportunity, consistent with efficiency and best execution, for investors’ orders to be executed without the participation of a dealer.
 See Paul Kiernan and Dave Michaels, “SEC’s Gensler Aims to Save Investors Money by Squeezing Wall Street” (Oct. 5, 2021), available at https://www.wsj.com/articles/secs-gensler-aims-to-save-investors-money-by-squeezing-wall-street-11633426201.
 See Dan Culloton, “A Brief History of Indexing” (Aug. 9, 2011), available at https://www.morningstar.com/articles/390749/a-brief-history-of-indexing.
 Based on the most recent public N-CEN filings (which include a data field that identifies whether a fund is an index fund) and the most recent public N-PORT filings. Calculation for “index” funds based on funds who declare themselves as index funds on Form N-CEN.
 See “Remarks Before the Healthy Markets Association Conference” (Dec. 9, 2021), available at https://www.sec.gov/news/speech/gensler-healthy-markets-association-conference-120921.
 See statistics from Securities Industry and Financial Markets Association, available at https://www.sifma.org/resources/research/us-treasury-securities-statistics/
 See Gary Gensler, “Statement on Proposed Rules Regarding Treasury Clearing” (Sept. 14, 2022), available at https://www.sec.gov/news/statement/gensler-statement-treasury-clearing-0914222.
 Ibid. “First, the proposal would strengthen the Commission’s rules for clearinghouses transacting trades in Treasuries, particularly with regards to gross and net margining. … Second, the proposal would change the broker-dealer customer protection rules to allow the customer margin that they collect to be onward posted to the clearinghouse, a process known as rehypothecation. … Finally, the proposal would require clearinghouses to have policies and procedures designed to ensure they facilitate access to clearing services for all eligible transactions, including for indirect participants, such as through the use of sponsored clearing.”
 See Gary Gensler, “The Name’s Bond” (April 26, 2022), available at https://www.sec.gov/news/speech/gensler-names-bond-042622.
 See Gary Gensler, “Market Structure and the Retail Investor” (June 8, 2022), available at https://www.sec.gov/news/speech/gensler-remarks-piper-sandler-global-exchange-conference-060822.
 This represents registered investment adviser (RIA) private fund gross asset value reported on Form ADV as of September 2022.
 See Board of Governors of the Federal Reserve System, “Assets and Liabilities of Commercial Banks in the United States,” available at https://www.federalreserve.gov/releases/h8/current/default.htm. Total assets $22.6 trillion as of Oct. 5, 2022 (Table 2, Line 33).
 See Gary Gensler, “Statement on Private Fund Advisers Proposal” (Feb. 9, 2022), available at https://www.sec.gov/news/statement/gensler-statement-private-fund-advisers-proposal-020922.