The recent resignation of Gary Gensler as Chairman of the Securities and Exchange Commission (SEC) has sent shockwaves through both the crypto community and broader investing public. Appointed to head up the regulator just over 18 months ago, Gensler had a brief but extremely high-profile tenure that was marked by forceful rhetoric about protecting investors and eliminating conflicts of interest. However, his departure under a cloud of criticism over ineffective leadership leaves profound worries about the accountability and transparency of markets under his watch unaddressed.
An Ambitious Agenda Collides with Unwillingness to Act
Coming in as Chairman, Gary Gensler arrived at the SEC with an extensive background both in public policy, including senior Treasury positions, and the fintech space from his time leading the Commodity Futures Trading Commission (CFTC). This left many observers optimistic he had the ideal blend of governmental expertise and industry insights to oversee crypto’s rise responsibly. Early statements indicated he grasped the risks posed by unchecked speculation and scam projects with his calls for investor caution and nuanced categorization of different cryptoassets based on their functionalities.
He also appeared eager to tackle several longstanding transparency and security flaws enabling market manipulation according to formal policy objectives. Specifically, in remarks to the Aspen Security Forum on August 3, 2021 Gensler pushed for regulation to curb retail stock trading apps from receiving payment for order flow (PFOF). This common practice in its current form allows retail brokers like Robinhood to profit by selling their user order information to wholesale market makers. As the middlemen these firms can then execute the actual buying/selling at slightly better prices and pocket the difference as effectively free profit.
While legal, PFOF structures create an inherent conflict of interest for brokers who have financial incentive to maximize such payments through deal flow rather than secure best market prices for their clients. Gensler stated they “have inherent conflicts associated with their payment flows” and that “we have zero tolerance for fraud.” Strong words, but over a year later PFOF endures completely intact with no meaningful attempt by the SEC to challenge the controversial arrangements between wholesalers and app brokers.
All Talk, No Action on Closing Dark Pools
The reluctance on display to curb even publicly acknowledged issues around retail stock trading has significantly dampened confidence in Gensler’s motivations. Drilling down further, there is even greater skepticism that the SEC under his leadership had any ability or willingness to tackle the mushrooming volumes of off-exchange equity activity flooding into opaque alternative trading systems (ATS) known as dark pools.
These private exchanges allow major institutional investors and hedge funds to make large block trades anonymously without disclosing details before execution. Intended originally to prevent sudden huge transactions from drastically impacting wider prices, dark pools have rapidly grown despite worries around price distortion and potential manipulation if misused. Estimates based on FINRA data show as much as 40% of overall US stock volume is now executed in dark pools rather than on registered national exchanges like NYSE and Nasdaq.
Gary Gensler is on record repeatedly confirming these trends and appearing alarmed at their consequences. In an astonishing 2018 CNBC interview he plainly declared “the equity markets, it’s not really about supply and demand anymore” agreeing the “plumbing” of markets is “broken”. Later at MIT in 2020 he described even more explicitly how “around 90-95 percent of trades don’t actually hit lit exchanges” making “the probability of front-running very high”.
Yet confronted with these appraisals almost daily after assuming the SEC Chair position Gensler pursued no meaningful reforms to reduce dark pool volumes or ban potentially abusive activities like naked short selling enabled under their cloak of anonymity. After years sounding alarms he apparently lost all motivation with actual authority to address core weaknesses harming price discovery and fairness.
Mounting Dissatisfaction and Speculation Around His Resignation
The predictable result has been escalating criticism over Commissioner Gensler’s clear inability to convert strong assessments into concrete positive outcomes for transparency and security. Ultimately this may have contributed to his sudden resignation from the SEC, with some sources indicating an internal ethics probe found improper coordination with activist short sellers seeking to sabotage certain target companies.
While unproven, there is rampant discontent both internally at the SEC and from Wall Street figures over paralysis in applying regulatory recommendations Gensler himself demanded. Nor has crypto fared much better in moving towards workable oversight solutions or receiving clear guidance on security classifications – issues the new Chairman acknowledged must be resolved early in his tenure.
Prominent lawyer and former federal prosecutor Nelson Cunningham suggested there is also growing frustration over intentional overreach by Gensler’s SEC aimed more at expanding bureaucratic power rather than properly executing their defined mission:
“A priority has been regulation and enforcement that intentionally brings cases destined to be reversed on appeal, so as to slowly expand the SEC‘s area of jurisdiction.”
Regardless of reasons, the inability to follow words with actions has eliminated trust in the Commission’s seriousness on reform under Gary Gensler’s leadership. To critics like investor rights advocate Nomi Prins this leaves regulated markets still dangerously tilted against fairness and accountability:
“Wall Street polices itself. The SEC is just paperwork around the edges and Gensler proved either unable or unwilling to change anything. The system protects itself.”
Thecombustible mix of surging trading outside oversight and skepticism around intentions now rains down on Gensler’s successor. Their in tray overflows with speculation, fraud risks requiring more than rhetoric to restore public confidence.
The Roadmap to Market Integrity – Priorities for Gensler‘s Successor
Whoever assumes the difficult task of helming the SEC next faces immense pressure to convert previously strong assessments around manipulation into tangible protections for market stability and transparency. In the process they must balance guiding responsible crypto innovation with adapting outdated frameworks that incentivize exploitative behavior undermining fairness and price discovery.
Immediately abolishing payment for order flow schemes allowing potential front running should be a top priority – cash payments from wholesalers to retail brokerages like Robinhood erode investor trust by enabling questionable third party handling of their orders. Related proposals to forcibly shift most volume back onto lit national exchanges would greatly reduce the current 40%+ share lost to dark pools where abuse risks escalate.
Above all the new Chairman must spearhead comprehensive new safeguards and auditing around hidden alternative trading systems which threaten the entire market infrastructure by concealing activities from scrutiny. Transparency around short selling and strict limits on off-exchange volumes are vital first steps in repairing dysfunctional plumbing that encourages predatory strategies as Gensler himself stated publicly on numerous occasions.
Without demonstrable willingness to enact such difficult changes following years of inaction, calls for a complete overhaul of the regulatory apparatus enabling systemic unfairness will intensify. The departure of Chairman Gensler was an indictment of paralysis in addressing widely recognized conflicts of interest and barriers to free and fair price formation. His successor ignores this clear wake up call for bolder reforms at their own peril.