Rewriting Wall Street’s Rulebook
The S.E.C. turns to market plumbing.Credit…Andrew Kelly/Reuters
The S.E.C. goes against the flow
Gary Gensler, who in his first year as S.E.C. chairman has raised alarms about the way stocks are traded, is expected to preview new market rules today that may limit some of the deals critics have said allow Wall Street firms to take advantage of individual investors.
The potential changes come about a year and a half after shares of AMC, GameStop and other so-called meme stocks shot up hundreds of percentage points in a matter of days. During the rally, a number of retail brokerages, including Robinhood, limited clients from buying more of their shares, prompting investigations from lawmakers and others. Many of the stocks of the companies involved eventually crashed. Melvin Capital, a hedge fund that suffered big losses when shares of GameStop and others soared, recently announced it was closing.
The S.E.C.’s push for changes is an indirect attack on “payment for order flow,” a long-controversial practice on Wall Street. It allows brokerages like Robinhood to sell the right to execute retail investors’ trades to bigger firms and wholesalers like Citadel Securities, potentially allowing them to profit by betting against less powerful and well-informed players.
Many are already grumbling about the prospective changes. Robinhood’s fee-free trading is made possible in great part by revenue from payment for order flow. So while eliminating that practice could restore trust, as DealBook has suggested, brokers would need to develop new business models. (A Robinhood spokeswoman declined to comment.) Some major wholesalers told DealBook that the S.E.C. had refused their input, but the big trading firms argue that the reported fix would only hurt the little guys. “The view is that payment for order flow somehow compromises market integrity, but the evidence shows that retail investors are getting a good deal,” the former S.E.C. chief economist S.P. Kothari told DealBook.
The S.E.C. has not said publicly how its potential fix would work. Former officials and market participants say the regulator is likely to propose a change in how trades are measured and executed. Instead of most stock transactions going directly to big trading firms, the new rules are likely to force most buy and sell orders to be completed through auctions hosted by stock exchanges. The idea is that auctions would guarantee investors the best execution price on each trade, rather than on trades in aggregate. The question, according to the former S.E.C. markets director Brett Redfearn, is whether the routing changes would serve investors or markets.
Critics expect a shift in power dynamics, but not a genuine fix. Here’s what they see happening. Exchanges would offer brokers incentives, replacing wholesaler payments; wholesalers would be choosy about trades, free from execution guarantees based on bulk deals; brokerages would have to hustle more and might start charging fees; and retail traders would either participate less or pay more. Markets might also become less lively because there would be little incentive to execute many trades and activity would end up concentrated in the top tier of stocks. “The key is going to be an economic analysis, whether the benefits outweigh the costs,” Redfearn said. He suspects they may not.
HERE’S WHAT’S HAPPENING
Treasury Secretary Janet Yellen says high inflation is likely to persist. She testified yesterday that the Biden administration was likely to revise its inflation forecast upward. On the same day, the World Bank further slashed its forecast for global growth this year, citing damage from the pandemic and Russia invasion of Ukraine.
Trader Joe’s faces its first union election. Employees at a Trader Joe’s in western Massachusetts last night filed for a union election that if successful would create the only union at the retailer, which has more than 500 locations and 50,000 employees nationwide. It follows successful unionization votes at Starbucks, REI and Amazon.
Credit Suisse predicts another quarterly loss. Hit by market volatility, monetary tightening, the war in Ukraine and ballooning legal bills, the Swiss lender has issued three profit warnings this year. It’s paring down its investment bank and refocusing on wealth management.
A culture clash at TikTok is reportedly triggering an exodus. Tension at TikTok’s e-commerce division between the platform’s Chinese owners and some of its London employees has led many staff members to leave since the company launched TikTok Shop in Britain in October, The Financial Times reported. Joshua Ma, a senior executive at ByteDance, which owns TikTok, reportedly said at a dinner this year that he didn’t believe companies should offer maternity leave.
The billionaire Rob Walton has reached a tentative agreement to buy the Denver Broncos. The sale to Walton and members of the Walton and Penner families, who amassed their fortunes largely through their stakes in Walmart, is expected to top $4 billion, a record price for an N.F.L. franchise. The announcement by the Broncos and Walton ends a long tussle between the children of the team’s longtime owner, Pat Bowlen, who died in 2019 at age 75.
Tesla stock analyst settles S.E.C. ‘accounting gimmicks’ case
Dan Ives, a popular tech stock analyst, has settled charges from the S.E.C. that he was part of a long-running scheme that allowed a company to report misleading sales figures.
The settlement, announced yesterday, was in a case that dates to 2017 and involves Synchronoss Technologies, a New Jersey telecoms company where Ives was head of investor relations before he took his current job at the brokerage firm Wedbush Securities. Ives, who covers Tesla and other companies, is widely quoted in the media.
Ives declined to comment to DealBook about the settlement. Ives settled the charges without admitting or denying wrongdoing, as is standard practice in S.E.C. settlements. A spokeswoman for Wedbush told DealBook that the case had been settled and would not affect Ives’s role at the firm.
It is one of a number of recent settlements with the S.E.C., which is starting to bring more cases of financial misconduct,according to Thomas Gorman, a lawyer at Dorsey & Whitney who follows the regulator closely. Gorman said, though, that the Synchronoss case was unusual in recent years in that it involved a Wall Street analyst, though not in his current position. Back in the 1990s, several high-profile cases were brought against analysts who helped hype certain tech stocks as the dot-com bubble expanded.
According to the S.E.C., Ives and six other executives at the company used “accounting gimmicks” to book at least $190 million in sales that it didn’t actually make. The S.E.C. says that Ives and others arranged a series of “side letter” agreements “for which revenue was recognized improperly.” In one instance cited by the regulator, Ives helped negotiate a deal in which Synchronoss advanced a consultant $4 million so that it could buy and then resell $3.6 million worth of software from Synchronoss. Ives promised the consultant that Synchronoss would cover any losses from the transaction. The deal was signed on Dec. 31, 2016, the last day the company could book a sale for the year.
Synchronoss paid $12.5 million to settle charges against the company. Ives paid $15,000 to settle charges against him and agreed to complete 30 hours in compliance training related to “revenue recognition and/or accounting fraud.”
“There is a lack of data that would give the public the confidence that these systems, as deployed, live up to their expected safety benefits.”
— J. Christian Gerdes, co-director of Stanford University’s Center for Automotive Research, on the difficulty of verifying claims by carmakers and tech companies about self-driving features.
A test of U.S. anti-hacking law
Nearly three years after the disclosure of one of the largest data breaches in the U.S., the former Amazon employee accused of stealing customers’ personal information from Capital One is on trial in a case that will test the power of American anti-hacking law, The Times’s Kate Conger reports. The accused, Paige Thompson, faces 10 counts of computer fraud, wire fraud and identity theft in a federal trial that began yesterday in Seattle.
Thompson is accused of violating an anti-hacking law known as the Computer Fraud and Abuse Act, which forbids accessing computers without authorization. In 2019, several years after she stopped working for Amazon Web Services, Thompson searched for clients of the service who had not properly set up firewalls to protect their data. She found files belonging to Capital One, and downloaded personal information on more than 100 million of the bank’s customers, the Justice Department said. Ms. Thompson has pleaded not guilty, and her lawyers say her actions — scanning for online vulnerabilities and exploring what they exposed — were those of a “novice white-hat hacker.”
Critics of the computer fraud law have argued that it is too broad and can penalize people who discover vulnerabilities in online systems or break digital agreements in benign ways (like using a pseudonym on a social media site that requires users to go by their real names). The Supreme Court narrowed the scope of the law last year. And in April, a federal appeals court ruled that automated data collection from websites, known as web scraping, did not violate the law. Last month, the Justice Department told prosecutors they should no longer use the law to pursue hackers engaged in “good-faith security research.”
Thompson’s trial will raise questions about how far security researchers can go before a pursuit of cybersecurity flaws breaks the law. Thompson’s lawyers have argued that she engaged in practices used by legitimate security researchers. But prosecutors said Thompson planned to use the information she gathered for identity theft and that she took advantage of her access to corporate servers in a scheme to mine cryptocurrency.
THE SPEED READ
ByteDance, which owns TikTok, is reportedly considering selling its minority stake in Poizon, an online sneaker marketplace. (Bloomberg)
The Chinese ride-hailing company Didi is reportedly in talks with a state-backed Chinese electric vehicle maker, Sinomach Automobile. (Reuters)
A funding squeeze at the buy-now-pay-later business Affirm could signal trouble for the sector. (Bloomberg)
Through multibillion-dollar projects, a new generation of Black real-estate developers are investing in community needs. (NYT)
Spirit Airlines is postponing a shareholder vote on its deal with Frontier until June 30, to review a revised counteroffer from JetBlue. (Business Wire)
C.D.C. raised its alert for monkeypox, with over 1,000 cases now confirmed worldwide. (CNBC)
The E.U. is requiring all new smartphones and many other digital devices to offer the same type of charging port by 2026: USB-C. (NYT)
The actor Matthew McConaughey, who is from Uvalde, Texas, met President Biden and called for new gun regulations. (NYT)
Best of the rest
Netflix’s bind: Keep spending on new content, or risks losing even more subscribers. (FT Lex)
Sheryl Sandberg’s legacy is Silicon Valley’s default advertising model. (Bloomberg)
“Twitter Must Tackle a Problem Far Bigger Than Bots” (Bloomberg Opinion)
Hong Kong, New York and Geneva top the list of the most expensive cities for expats. (Bloomberg)
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