The SEC’s vision for market competition would stifle innovation


Securities and Exchange Commission Chairman Gary Gensler recently gave a speech titled “Competition and the Two SECs.” It should be called “The SEC and Two Competitions”. For most people, competition is something that happens in the marketplace. Buyers and sellers do what they want, and intermediaries come up with innovations that succeed or fail. The job of regulators is not to pick winners and losers, nor to limit choices, but to set general rules and put an end to illegal practices. For Gensler, it seems, competition is the opposite. It is something established by regulators, who tell buyers, sellers and intermediaries what to do, in order to make markets work the way regulators think best.

The difference is illustrated by the two sports analogies used by Gensler. In cross-country racing, there are few rules. You can’t ride bikes or shoot other racers, but those serve to define the sport and enforce general laws, not to micromanage how competitors race. This is what most people call pure competition.

Football, however, requires a 245-page rulebook, most of which is unknown to players, coaches, fans and commentators. Few of the rules are the basic definitions of the sport or prohibitions against crimes, rather they are designed by the administrators to make the game play as they imagine it. If fans are bored from too many field goal attempts, change the rules to make field goals less appealing. If the action is too slow for TV, change the rules to speed it up. Football is a heavily regulated sport to produce a very specific type of competition favored by administrators. This necessarily blocks innovation unless it first goes through an exhaustive regulatory process.

Gensler’s proposals all aim to reduce the choice of investors, users of capital and intermediaries and to block innovation; all with the aim of producing the specific type of competition he prefers. For example, he notes that large intermediaries can reduce costs for investors and users of capital through “scale, network effects and access to valuable data”. He then points out that “technological innovations repeatedly disrupt established business models”. This is what most people call competition. The winning intermediaries grow bigger and thus reduce costs, but smaller entities always emerge with successful innovations. Investors and users of capital can choose between large known low-cost providers or new opportunities offered by emerging providers.

It’s the antithesis of competition at Gensler. He wants the SEC to be “vigilant in areas where concentration and potential economic rents have accumulated, or may do so in the future.” Dismantle the big corporations because they might one day overload. Regulators, not the market, pick winners and losers, and big winners must be prevented from getting too big.

Gensler goes on to advocate regulation of transparency and access. Both sound good, but these are limits to the competition. Many investors and users of capital are opposed to the disclosure of all their interests, trades and positions. Today, an investor can choose to publish their takeover bids or quietly seek a counterparty. A company in need of capital can make a public offering or negotiate a private placement. Various public and less public exchange mechanisms compete for customers.

But Gensler argues that everyone having the same information is more important that investors and users of capital can choose how to arrange transactions. This may or may not be true, but uniform transparency is the opposite of competition.

Similarly, investors and users of capital can now choose which parties to deal with. An investor can go to an exchange that allows high frequency traders or blocks them. A capital user can choose dealers who meet his standards. A market maker may limit certain activities to retail traders only, or to passive investors, but not to hedge funds. A broker can exclude unreliable market makers from its routing algorithm. A hedge fund doesn’t have to take money from investors it doesn’t trust.

Gensler prefers that all market participants have access to the same conditions for all transactions. He calls it more competition, but it is a restriction on competition. The competition is only about price, not about any of the other aspects that investors and users of capital care about, such as confidentiality, reliability, credit, trust, business relationships, etc. types of competition, as well as innovation.

We live in a time of unprecedented financial competition, not just innovations within traditional financial markets, but radical new concepts in decentralized finance and crypto exchanges. These aren’t cookie-cutter regulated institutions offering the same services at slightly different prices, they’re people promoting whole new ways of doing things. It’s easy to see why an old-school regulator like Gensler would want to put the genie back in the bottle — at least until the SEC can watch it for a few decades. But it’s hard to understand why he uses the word “competition” for calls blocking new ideas and forcing everyone to do things the same way.

More from Bloomberg Opinion:

• Gensler’s SEC Learns to Pick Its Battles: Editorial

• Matt Levine’s Money Stuff: Crypto wants SEC rules

• Which retail investors does the SEC want to protect? : Editorial

This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.

Aaron Brown is a former Managing Director and Head of Capital Markets Research at AQR Capital Management. He is the author of “The Poker Face of Wall Street”. He may have an interest in the areas he writes about.

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