Talking Trading With Robinhood; BlackRock's Washington Expansion; Peirce Blasts SEC's `Dwindling' Public Outreach
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Friday Q and A: With the army of young people it has drawn to investing, Robinhood Markets has garnered an outsized share of attention in Washington. That’s especially true at the SEC, where Chair Gary Gensler has championed big policy changes on market structure and brokers’ use of technology that could upend the firm’s business.
Robinhood has mounted an aggressive campaign to fight back. We recently sat down with a key player in the firm’s response, Steve Quirk, the chief brokerage officer. Suffice it to say, he’s pretty fired up.
A true markets guy who started his career in the Chicago pits when paper flew across the trading floor, Quirk brings a deep perspective to the current debates about digital engagement practices and payment for order flow. And as a plain-spoken midwesterner, he’s able to explain the complexities in a way that government officials and average Americans can understand. Read on to learn how he woos lawmakers and why he thinks the SEC needs to talk more to young investors – instead of “nanny-stating” them. What follows is our (lightly edited and condensed) conversation.
Capitol Account: What do you do when you come to Washington?
Steve Quirk: We have a lot of people that are very deep market structure experts. I understand it, but I come at it from an angle of putting myself in the place of 23 million customers. And I try and do it when we talk to regulators or anybody here: `This is what it's going to look like for them, what you’re proposing.’...Sometimes when you look at it through that lens, you realize this is probably not going to be very beneficial.
CA: How about on Capitol Hill? These are often complicated issues for lawmakers.
SQ: A lot of elected officials actually are eager to learn. And I love talking to them.
CA: What do you tell them?
SQ: We’ve just brought 23 million customers into the marketplace in four or five years…We’ve never had a higher rate of participation in the market – young, diverse [investors]. Those people over there [at the SEC] are introducing a bunch of rules that are probably going to kick them out. I think you should be aware of that, and you should understand what's going to happen if you don't step in. When you lay it out like that, it's really awesome. And by the way, that's both sides of the aisle. It's a great conversation, no matter who you're talking to.
CA: If you can mobilize them, your investors could be a powerful lobbying force.
SQ: Oh yeah, definitely. I'm not going to tell you that when we walk into an elected official’s office that we don't tell them how many people in their state are Robinhood customers. We have 750,000 in Massachusetts – and most people don't win their election by more than 750,000 votes. I think it's good for them to understand.
CA: Does the argument work at the SEC?
SQ: They don't want our help – which tells you something…In the past, we've gone to trading and markets [staff members] and said, `Tell us what you want to solve. Tell us what you're thinking about. We have loads of data.’
CA: The most contentious aspect of the SEC market structure plan would set up auctions to handle retail orders. How would it impact your customers?
SQ: It would be the most disruptive of the proposals…I’ll use an analogy. I'm driving down the street, I'm low on gas, there are four gas stations. I pull into one, which has the cheapest pricing. I start to fill up and suddenly the pump stops and the price goes up. I put a couple more gallons in, and then it just cuts me off – no more gas. I look across the street and drive over. Whoa – the price went up by 20 cents at that gas station. It turns out they were watching me…That's exactly what this looks like.
CA: The idea, broadly speaking, is that auctions could drive up costs for investors, and even make it harder for them to find somebody on the other side of a trade. The industry has also argued that the process may not be a problem if somebody is selling, say, Amazon, but it could wreak havoc for stocks with low trading volume.
SQ: The market makers, specifically [Virtu Financial CEO] Doug Cifu went into the SEC and said, `I'm going to tell you what I'm going to do. I will continue to make markets on those valuable stocks. I will not make markets on the ones that I don't make money for, that I accommodate retail brokers on today.’ That's what's going to happen. And by the way, that's a big percentage of what's being traded – it can be up to 40 percent.
CA: What did the SEC say?
SQ: We made the same point, and the response was: `We think for the good of the whole ecosystem, there is going to be some detriment to retail investors.’...That's not a way to build confidence.
CA: What about the SEC’s predictive data analytics rule? Initially many saw the effort as targeted at Robinhood. But now it seems like all of finance is up in arms.
SQ: It’s funny, when it first was introduced…I called all my friends at E-Trade, my friends at Fidelity, my friends at Schwab. And I [asked], are you looking at this? And they said, `You mean the Robinhood rule?’ I [said], `No, no, no, no, no. You might think it's a Robinhood rule. You need to take a look at this thing. There is not a financial services firm in America that will not be impacted by it.’
CA: The SEC chair says he is worried about the potential conflicts of interest that can arise with complicated technology. And he talks a lot about artificial intelligence.
SQ: It's just a nice buzzword. A nice buzzword that they put in there to try and spook people.
CA: What about digital engagement practices? Do these messages or prompts that investors now get on their phones pose conflicts?
SQ: This is about the intuitive use of data…You've indicated to me that you have a portfolio and if there's news on it, and the stock makes a 52-week high or low, you would like to be alerted. Okay. Am I doing that because I’m trying to trick you into trading more? I'm doing it because you want us to do it.
CA: But some of your opponents point out that Robinhood makes a lot more profit when its customers trade more.
SQ: There's a misunderstanding of what we do…It's a mutually beneficial relationship. There's an assumption that all we're trying to do is make money to the detriment of these customers, which couldn't be farther from the truth. The best customer we have is one who advocates and says, `I want to do all my investing here. You've taught me to do it in a suitable manner and I'm doing wonderfully.’
CA: Do you think at some level the SEC is thinking, these are younger investors and they may need extra protections?
SQ: They need to talk to these investors. The investors would love to tell them: `I probably know more about the market than you do, and you're regulating it.’...If we spent as much time thinking about educating people to invest in a suitable manner as we did about nanny-stating them, this industry would be amazing…(Friday)
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Bulking Up for Battle: It’s no secret that BlackRock has been struggling to quell a firestorm fueled by politicians on both sides of the aisle. But after a turbulent couple of years as the poster child of the ESG wars, the firm’s game plan for dealing with the seemingly intractable situation is starting to come into focus. One central element: A much bigger Washington operation.
In comparison to many financial companies, BlackRock has traditionally kept a lean lobbying team. As its problems continue to mount – both in the capital and in Republican-led states – the asset managers’ executives are concluding that a more forceful and sustained response is needed. One said the struggle has become “mission critical.”
Countering the onslaught isn’t an easy task, especially when the incoming is from both the left and the right. Republicans have made BlackRock a punching bag in their campaign against “woke” money managers that push environmental, social and governance policies that conservatives consider far outside the mainstream. Democrats, on the other hand, have argued that a behemoth with some $10 trillion under management needs to be reined in with extra oversight.
Sources say that the firm is now gearing up to double the size of its advocacy team – to about 20 people. The first step came last month with the addition of Joe Wall, who BlackRock hired away from Goldman Sachs, to run U.S. government affairs and public policy. He’s been given a substantial budget and has already been putting out feelers for potential candidates, the sources said. Once he finishes garden leave and starts at BlackRock next month, Wall is expected to bring on at least two senior lobbyists, a Republican and a Democrat.
Though it hasn’t been announced yet, one of Wall’s colleagues at Goldman, S. Jane Moffat, will be joining BlackRock to run state government affairs, the sources added. The company is also making plans to hire several in-house lobbyists in different regions of the country – a nod to the troubles it is facing in places like Texas, Florida and West Virginia where officials, unhappy with BlackRock’s positions on social issues, have moved to divest pension fund assets from the firm.
The dual Goldman hires aren’t completely surprising, some pointed out, because the bank once faced a similarly deep political and public relations crisis. After the 2008 bailouts earned it the nickname of Vampire Squid, Goldman dug out in part by overhauling its D.C. office. (Funny enough, Leigh Farris, BlackRock’s new global head of communications, is also a Goldman alum.)
BlackRock’s Washington expansion is being driven by John Kelly, global head of corporate affairs. A former executive at Roku, Starbucks and Microsoft, he joined the company last summer with a mandate to fix its reputational issues and beef up its government affairs efforts. A BlackRock spokesman declined to comment.
Also of note: Samantha DeZur, who headed up BlackRock’s regulatory policy team, has left and will be starting a new job at Millennium Management.
The hedge fund, which has $62 billion under management, hasn’t had as much of a presence in Washington as some of its competitors. But that appears to be changing.
The firm also recently hired Dan Berkovitz, a former CFTC commissioner…(Thursday)
Closed Doors Under Gensler? Securities lawyers from across the country are in Washington for the SEC Speaks conference, a two-day extravaganza where top officials and dozens of staff members lay out the agency’s priorities and give a bit of an outlook for the year ahead. The gathering started out a little sleepily as Gensler reminded the crowd in his opening speech about the commission’s historical role of “enhancing the integrity of and building trust in our capital markets.”
Things picked up significantly an hour or so later when Hester Peirce took the stage to talk about “the dwindling of genuine commission engagement with the public,” especially when it comes to providing informal guidance. And she pinned the blame squarely on Gensler (though not by name).
“The root of the problem is that the commission discourages the staff from offering much more than shrugs, silence, slow-walking, sighs,” she said. “The culture at the top of the SEC has changed, and that has led to a change across the whole agency in the way we interact with the public.”
The Republican commissioner, no surprise, also faulted Gensler’s vast agenda. The “unreasonably short comment periods” for far-reaching plans have discouraged feedback, she noted, as has the chair’s propensity for including numerous alternatives in proposed rules so they can be scaled back.
“The commission should think about each rule proposal as an opportunity to foster a public discussion with the goal of developing the best solution to a carefully identified problem – not as the opening bid in a hard driving negotiating strategy designed to force [the] public to accept a slightly less onerous, though perhaps still unworkable, final rule,” she said.
Peirce, who once worked as an SEC staff attorney, stressed that her concerns go to the heart of the daily work of the agency. Companies have traditionally received guidance about tricky regulatory issues, but are now often “met with crickets,” she said.
The situation has made the industry a lot more reluctant to engage with its regulator, Peirce emphasized. “Some perceive meeting with the commission is not only unproductive, but inadvisable,” she said. “People have told me that they would only talk to me with lawyers, or they've said that they're meeting with me against the advice of counsel. People worry that the inevitable result of meeting with the commission is just going to be an enforcement action, rather than a genuine discussion.”
“SEC staff are in frequent, ongoing and productive communication with market participants, investors and other stakeholders about rulemakings and other regulatory activity. Staff regularly issues guidance, provides no-action relief and comments on filings. Staff prioritizes providing the market with helpful, clear information. That said, it is not the role of staff to help well-heeled lawyers find innovative or creative ways around the securities laws.”…(Tuesday)
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