SEC Chairman Gensler
Photo: Melissa Lyttle/Bloomberg via Getty Images

Gary Gensler is making his move on Wall Street’s market makers

Protocol Fintech

Good morning, and welcome to Protocol Fintech. This Thursday: Gensler’s big move, Apple’s secret payments weapon and the CFTC’s crypto punch.

Off the chain

As Apple moves to take more of its payments business in-house, there’s one name you need to know: Cherie Fuzzell. She joined Apple in 2015 after running ParkMobile, and is senior director of Global Alliances for Apple Pay. Filings also show that she’s president of its Apple Payments subsidiary, the entity registered as a money transmitter with most states and a logical base on which Apple might build its own payments architecture.

Intriguingly, she was also formerly on the board of Intelligent Systems, the parent of payments processor CoreCard, which Apple partner Goldman Sachs picked in 2019 to handle Apple Card operations. Payments is a small world.

— Owen Thomas (email | twitter)

Gensler gets in the flow

SEC Chair Gary Gensler has been talking since he started the job about making big changes to the U.S. equities markets. Now those potential changes are coming into focus.

On Wednesday in a speech at a Piper Sandler conference, Gensler suggested the use of auctions to ensure the best prices for stock trades. That idea, along with several other big changes that the SEC is considering, could mean breaking the lock wholesalers currently have on executing the vast majority of retail orders. That also means payment for order flow, the blockbuster business model that fueled Robinhood’s no-commissions approach and that other retail brokerage giants more quietly use, could face retirement.

Gensler says the market needs greater “order-by-order” competition. That’s not great news for market makers, or the brokers they split profits with through payment for order flow.

  • An auction system could bring better prices, Gensler argues. He noted that U.S. options markets have an auction system and that could be used to help guide changes.
  • Currently, retail orders are executed mainly by wholesalers, while stock exchanges such as the NYSE or Nasdaq handle large institutional orders. Analysts have argued that this separation results in worse prices for both retail and institutional trading.
  • "The vast majority of retail marketable orders are flowing to wholesalers — 90%-plus to a small handful of wholesalers that pay for order flow," Gensler said. "And what's more, this segmentation means that institutional investors, such as pension funds and others, don't get to interact directly with that order flow. This segmentation, which isolates retail market orders, may not benefit the retail public as much as orders being exposed to order by order competition."

There are big gaps in the current price-disclosure regime. Information about which trades are getting better prices isn’t always clear.

  • Gensler suggested that more disclosure is needed — particularly from brokers, who currently do not need to disclose as much information about pricing quality as wholesalers and exchanges in so-called Rule 605 forms.
  • The National Best Bid and Offer system, which benchmarks trade pricing, used to include most trades. That’s no longer true, Gensler said his staff found. The smaller trades known as odd lots accounted for more than 55% of trades in March, which means the “best bids” no longer reflect most of the market. Retail investors are most likely to buy or sell at odd-lot prices.

Payment for order flow is absolutely in Gensler’s sights. He name-checked Robinhood in his speech.

  • He reiterated his view that payment for order flow is a conflict of interest, and said he has asked his staff for a proposal to address this.
  • "Payment for order flow can distort routing decisions — certain principal trading firms seeking to attract Robinhood’s order flow told them that there was a trade-off between payment for order flow and price improvement for customers," Gensler said.
  • He also noted that not all brokers pay for order flow and that some with zero commissions do not, perhaps seeking to address claims that banning payment for order flow would mean the end of zero-commission trading.

Gensler’s to-do list is long, the rule-making process is slow and Wall Street will make its voice heard. Robinhood Chief Legal Officer Dan Gallagher slammed the proposals ahead of Gensler’s speech Wednesday, suggesting that the SEC chief was unwelcoming to the kinds of people zero-commission trading has brought into the market. That suggests the tenor of the fights ahead.

The SEC could begin proposing these various rules this fall, according to the Wall Street Journal, and public comment would follow. In a video he posted on Twitter this week, Gensler acknowledged it takes a long time to make changes under federal laws governing rule-making. And he read some “mean tweets” aloud. There will almost certainly be more.

— Tomio Geron (email | twitter)


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On the money

On Protocol: Suzanne Martindale, head of California’s Division of Consumer Financial Protection, has some major crypto worries. “We are getting complaints where people are just straight-up being defrauded,” she told Protocol in a Q&A.

Many more payments and gig-economy companies will be issuing tax forms. The Internal Revenue Service’s new rule that companies must report gross payments of over $600 a year is drawing wide criticism in the tech industry, saying that it causes confusion and potentially unfair tax burdens for small businesses and online sellers.

Also on Protocol: New York’s Department of Financial Services issued new regulatory guidance on stablecoins, where licensed crypto entities can only offer stablecoins that are fully backed by a reserve of assets and redeemable by holders within two business days.

A former exec says the company misled investors. Sarah Pierce, former executive vice president for Sales and Operations, filed a complaint Tuesday, stating that she had warned CEO Vishal Garg that his layoff plan violated California’s Warn Act.

Affirm’s stock slide could be a bad sign for other “buy now, pay later” companies. After Apple introduced itself as a direct competitor, Affirm’s shares plunged. Now analysts are worried that the competitive sector may be hit hard by rising interest rates and shrinking household income.

The CFTC packs a crypto punch

CFTC Chair Rostin Behnam said Wednesday that his agency won't be weak on crypto — and added that anyone who thinks otherwise is confused.

"We are one of the toughest cops on the beat," he said at an event hosted by the Washington Post. "We have a strong enforcement program, and we are very, very strong in terms of our market oversight and surveillance."

Behnam defended the agency against the notion that the SEC would be tougher in overseeing cryptocurrencies and pushed back on the view that the emphasis on CFTC regulation in the Lummis-Gillibrand bill amounts to a win for the industry.

"It's just a misunderstanding of the securities laws and the commodities laws," Behnam said, saying that the kinds of regular disclosures that securities issuers make through the SEC aren't useful for many cryptocurrencies, including bitcoin.

Read the full story on

— Ben Brody (email | twitter)

Moves and hires

Former U.S. Solicitor General Donald Verrilli Jr. has joined Grayscaleas a senior legal strategist. Grayscale said the former top attorney in the Obama administration will bolster its efforts to convert its bitcoin trust into an exchange-traded fund.

Paradigm has hired Katie Biber as chief legal officer. Biber served as general counsel for Mitt Romney's presidential run and has since worked in counsel roles for Airbnb, Thumbtack, Anchorage and, most recently, Brex.

Glenn Swanson has joined Toast as vice president of Engineering, Fintech. He was most recently a senior director of Software Engineering at PayPal.

Salman Syed is leaving Marqeta after nearly six years with the payments company. He was most recently the firm's senior vice president and general manager for North America.

Rho has hired Alexa Summer as its chief legal officer. She was previously risk and regulatory lead counsel at Airbnb and an assistant U.S. attorney.

Coinbase has hired Josh Fendrick as a manager of U.S. policy. He was most recently an economic policy adviser to Sen. Gary Peters of Michigan.


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Thanks for reading — see you tomorrow!

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