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It doesn’t take a lot to get Gary Gensler whipped up into a regulatory frenzy. And his Securities and Exchange Commission’s report on March’s market madness certainly doesn’t give him a lot.

A long-awaited report from the Securities and Exchange Commission on the hyperbolic trading in shares of the struggling video game retailer and other stocks found that everything worked largely the way it was supposed to.

The 45-page report, released on Monday, suggested no policy changes in response to the heavy trading in GameStop and other little-regarded shares that soared in value, thanks in part to posters on Reddit and Twitter, where many have gathered amid a pandemic boom in amateur trading.

SEC staff found no evidence of hedge funds “naked shorting,” i.e. short-selling shares that hadn't been borrowed, as some online posters claimed.

It also ruled out the possibility that players like Citadel Securities were snapping up GameStop stock to hedge against the call options they were themselves writing.

No matter! Gensler has had his eye on payment for order flow, gamification, cryptocurrencies and all the rest of it for months, and the fact that his own people found that everything worked exactly as it should have done will not change that.

“Consideration should be given to whether game-like features and celebratory animations that are likely intended to create positive feedback from trading lead investors to trade more than they would otherwise,” the SEC said in Monday’s report.

“Our markets have moved to zero commission, but it doesn’t mean it’s free. There’s still payment underneath these applications. And it doesn’t mean it’s always best execution,” the SEC chief said on CNBC’s “Squawk on the Street….”

“We’ve had cases that we’ve announced in the last 18 months where there has been this conflict between the broker on the one hand and this payment for order flow on the other,” Gensler added…. Gensler added Tuesday morning that the SEC is now turning its attention to short selling, settlement, conflicts involving digital engagement practices and market structure. Then the commissioners will weigh in and the agency will put the recommendations out for public comment, he said.

Perhaps he’ll take a page out of the usually very limited playbook of German regulators, who do not like what they see in their country’s newly-minted second-most valuable bank.

N26 on Monday said the regulator, BaFin, had ordered it to limit new European customers to 70,000 a month….

Regulators have repeatedly found problems with N26’s internal controls, which banks are expected to maintain as a front-line defense against money laundering and other illegal activity…. In June, BaFin fined N26 €4.25 million, or about $5 million, for not making timely submissions of required filings that flag suspicious customer transactions, often a tip-off to authorities for illegal activity. In May, the agency told the bank to beef up its anti-money-laundering controls and appointed a monitor to oversee the process, an unusual step to ensure compliance.

S.E.C. Describes the GameStop Frenzy, but Not What to Do About It [NYT]
SEC debunks conspiracy theories about meme stock mania [Axios]
SEC’s GameStop Report Questions ‘Game-Like’ Trading Apps [WSJ]
SEC chief Gensler says regulator assessing future of payment for order flow [CNBC]
German Fintech N26, Newly Valued at $9 Billion, Again Draws Regulator’s Eye [WSJ]
Fintech firm N26 is now worth more than Germany’s second-largest bank [CNBC]

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SEC Would Not Bold As To Just Outright Kill Payment For Order Flow

It’s just going to smother it with regulations.


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By US government [Public domain], via Wikimedia Commons

‘Wait, Senator, Don’t You Want To Hear About This Mug Who Said He Had An AI Supercomputer In His Mom’s Basement?’

Selections from the cutting-room floor of Gary Gensler’s Senate Banking Committee testimony.