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How the SEC should address the GameStop trading frenzy

Andy Green, from the Center for American Progress and former SEC counsel, joined Yahoo Finance Live to discuss how the SEC should address the GameStop trading frenzy.

Video Transcript

SEANA SMITH: We want to stick with this topic. And for that, we want to bring in Andy Green. He served as counsel to SEC under the Obama administration. He's also now a senior fellow for economic policy at American Progress. And Andy, it's great to have you on "Yahoo Finance" today.

Just the question at hand-- the role of regulators and how, I guess, they should be approaching this issue. First, just to get your perspective on what we've seen happen with this speculative frenzy surrounding names like GameStop and AMC over the last couple of weeks.

ANDY GREEN: Yeah. You know, we're still learning things new about what went on every single day. I think the financial markets can move quickly. And those who are up can end up down. Those who are down can end up up. So I think that's why it's really important for investors to be prudent, to be looking for the long term, to be aware of the basics about not borrowing on margin and taking risks that they can't afford.

And that's why we need regulators on the beat, keeping up with the rules, to keep up with new technologies and new technological platforms like we're seeing with Reddit and other things. And also putting in place the technological oversight-- the tools necessary to monitor markets.

There's a monitoring tool called the Consolidated Audit Trail. It's a bit of a wonky term. We call it the CAT. It has been proposed for more than a decade. And regulators-- the SEC under the Trump administration and even further back than that at the end of the Obama administration-- you know, they dragged their feet on getting it done. And now the result of that is that it is a lot harder for the SEC to see what's going on in these fast-moving markets. So--

ADAM SHAPIRO: Andy?

ANDY GREEN: --there's a lot to be done.

ADAM SHAPIRO: And so, on that, I want to ask this question. Who benefits from the sale of order flow? And what would happen if the regulators were to say that the free platforms will no longer be able to sell order flow to different funds? And is there a way to know if those funds, perhaps as they are buying order flow, might be front-running stock?

ANDY GREEN: Well, I think this is exactly where the CAT would help inform a lot of these questions. We do have some oversight tools in place that do try to catch front-running. It's illegal. It's one of the reasons why both the SEC and the CFTC bring a lot of enforcement actions.

You know, I think that payment for order flow has been something that, you know, you can go a good far back. Then people have criticized it. Senator Levin and Senator-- have done hearings on it, called it a hidden tax on investors.

And, you know, it may well put folks who are currently relying on it to basically sell the order flow so that their clients can be bet against by somebody else. It's going to put those folks who are using that as their business model either out of business or force them to dramatically change.

And that probably would be a good thing for having markets where you're not having folks who are supposed to be executing trades in the best execution, the best interest of their clients, you know, selling the [INAUDIBLE].

ADAM SHAPIRO: So Andy, I want to interrupt you on that. Let me interrupt you because it would put-- at least the business model we know for Robinhood and for these three platforms is order flow, the sale of order flow. What really happens to the democratization of the markets if you stop the sale of order flow? Would it be catastrophic?

ANDY GREEN: You know, these things all work together in complex ways. I'm not going to propose on TV a comprehensive reform of payment for order flow because you have to look at the whole market. But I am of the view that conflicts of interest are not good for investors. They're not good for our financial markets. We need to be reducing them, not sort of permitting them to increase.

And you know, if you think about all of the different types of technological platforms out there that look like they're free, what really is happening is that the hit-- the cost is hidden. And they're passed on to ordinary users of, you know, the big tech sites or other parts of society in ways that we've lost millions and millions of dollars of revenue to local journalism because advertising revenue doesn't flow there.

So there are hidden costs to a lot of these platforms and free services that we're going to pay for and we need to think about more carefully.

SEANA SMITH: Hey, Andy, I know you know a lot of the incoming members here in the Biden administration. We talk about Gary Gensler, Biden's pick here to lead the SEC. Just what do you think the SEC is going to look like under Gensler, and I guess if you have any insight just in terms of how you expect him to approach topics like this?

ANDY GREEN: So I think it's going to be a breath of fresh air. We have had an SEC that, certainly out of the Trump administration has been rowing in the wrong direction in terms of making sure the markets work for ordinary investors, work for the public interest, work for the long-term risks of our society and our economy, whether it be climate or other similar issues, racial justice, worker rights. And there's a number of examples I could offer on that.

But even further back, you know, the FCC has been a very cautious agency led by folks that I think after the 2008 financial crisis have wanted to do the right thing, but have not always later on been brave enough to move forward, and in the aggressive ways needed to reestablish the rules of the game on financial markets.

So I think Gensler would be a breath of fresh air. He is obviously a brilliant visionary in the space, one of the most effective regulators. You know, he got done in four years what the SEC basically couldn't finish in eight.

And he's also somebody who really knows the markets. So he's not going to be afraid to call the bluff-- call BS on those who are coming and saying, oh, it can't be done. This is too scary. This is too bad. No, he's saying we're going to do it this way, and it's going to work better for everyone--

ADAM SHAPIRO: He'll probably--

ANDY GREEN: --public interest and the markets.

ADAM SHAPIRO: He'll probably get asked. He'll probably be asked about these proposals to tax stock transactions. What do you think? Is that realistic?

ANDY GREEN: To tax stock transactions-- well, that's something that's going to-- if you're really talking about a financial transactions tax, that's something that has to occur via Congress through the finance committee and other formal ways. If you're talking about the fact that the SEC already has a very modest fee that it puts on every single transaction as a way to fund itself, you know, the markets seem to work just fine on that.

So I'm not-- or are you talking about the hidden tax payment for order flow? All those different things are very, very complicated and very different.

ADAM SHAPIRO: No, I'm talking about AOC.

SEANA SMITH: Andy Green--

ADAM SHAPIRO: But I think [INAUDIBLE]

SEANA SMITH: We'll leave it there, serving as counsel to SEC during the Obama administration and also senior fellow for economic policy at American Progress. Thanks for taking the time to join us.

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