[Senate Hearing 117-95]
[From the U.S. Government Publishing Office]


                                                       S. Hrg. 117-95

                   WHO WINS ON WALL STREET? GAMESTOP, 
                   ROBINHOOD, AND THE STATE OF RETAIL 
                   INVESTING

=======================================================================

                                HEARING

                               BEFORE THE

                              COMMITTEE ON
                   BANKING,HOUSING,AND URBAN AFFAIRS
                          UNITED STATES SENATE

                    ONE HUNDRED SEVENTEENTH CONGRESS

                             FIRST SESSION

                                   ON

   EXAMINING THE PRACTICES THAT ENCOURAGED THE VOLATILE ACTIVITY IN 
 STOCKS, HOW IT AFFECTS OUR ECONOMY IN THE LONG TERM, AND WHO BENEFITS 
    AND WHO LOSES FROM THIS ``TECH-INDUCED'' STOCK MARKET VOLATILITY

                               __________

                             MARCH 9, 2021

                               __________

  Printed for the use of the Committee on Banking, Housing, and Urban 
                                Affairs


                Available at: https: //www.govinfo.gov /

[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]

                               __________

                    U.S. GOVERNMENT PUBLISHING OFFICE                    
46-082 PDF                 WASHINGTON : 2022                     
          
-----------------------------------------------------------------------------------   
 
            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                     SHERROD BROWN, Ohio, Chairman

JACK REED, Rhode Island              PATRICK J. TOOMEY, Pennsylvania
ROBERT MENENDEZ, New Jersey          RICHARD C. SHELBY, Alabama
JON TESTER, Montana                  MIKE CRAPO, Idaho
MARK R. WARNER, Virginia             TIM SCOTT, South Carolina
ELIZABETH WARREN, Massachusetts      MIKE ROUNDS, South Dakota
CHRIS VAN HOLLEN, Maryland           THOM TILLIS, North Carolina
CATHERINE CORTEZ MASTO, Nevada       JOHN KENNEDY, Louisiana
TINA SMITH, Minnesota                BILL HAGERTY, Tennessee
KYRSTEN SINEMA, Arizona              CYNTHIA LUMMIS, Wyoming
JON OSSOFF, Georgia                  JERRY MORAN, Kansas
RAPHAEL WARNOCK, Georgia             KEVIN CRAMER, North Dakota
                                     STEVE DAINES, Montana

                     Laura Swanson, Staff Director

                 Brad Grantz, Republican Staff Director

                       Elisha Tuku, Chief Counsel

                 Dan Sullivan, Republican Chief Counsel

                   Mark Uyeda, Republican SEC Detail

                      Cameron Ricker, Chief Clerk

                      Shelvin Simmons, IT Director

                    Charles J. Moffat, Hearing Clerk

                                  (ii)


                            C O N T E N T S

                              ----------                              

                         TUESDAY, MARCH 9, 2021

                                                                   Page

Opening statement of Chairman Brown..............................     1
        Prepared statement.......................................    36

Opening statements, comments, or prepared statements of:
    Senator Toomey...............................................     4

                               WITNESSES

Gina-Gail S. Fletcher, Professor Of Law, Duke University School 
  of Law.........................................................     6
    Prepared statement...........................................    37
Rachel J. Robasciotti, Founder and Chief Executive Officer, 
  Adasina Social Capital.........................................     8
    Prepared statement...........................................    47
Teresa Ghilarducci, Bernard L. and Irene Schwartz Professor of 
  Economics, The New School......................................    10
    Prepared statement...........................................    49
Michael S. Piwowar, Executive Director, Milken Institute Center 
  for Financial Markets..........................................    11
    Prepared statement...........................................    53
    Responses to written questions of:
        Senator Sinema...........................................    64
        Senator Crapo............................................    65
        Senator Hagerty..........................................    66
        Senator Daines...........................................    68
Andrew N. Vollmer, Senior Affiliated Scholar, Mercatus Center at 
  George Mason University........................................    13
    Prepared statement...........................................    61
    Responses to written questions of:
        Senator Daines...........................................    70

              Additional Material Supplied for the Record

``Price Improvement: Core of Retail Execution Quality'', 
  Bloomberg Intelligence, Larry R. Tabb..........................    74
Letter submitted by Center for Capital Markets Competitiveness...    76
Letter submitted by CATO Institute...............................    91
Letter submitted by SIFMA........................................    97
Letter submitted by Citadel Securities...........................   100
Letter submitted by FINRA........................................   104
Letter submitted by the SEC......................................   121
Letter submitted by Robinhood....................................   127

                                 (iii)

 
 WHO WINS ON WALL STREET? GAMESTOP, ROBINHOOD, AND THE STATE OF RETAIL 
                               INVESTING

                              ----------                              


                         TUESDAY, MARCH 9, 2021

                                       U.S. Senate,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.
    The Committee met at 10:02 a.m., via Webex, Hon. Sherrod 
Brown, Chairman of the Committee, presiding.

          OPENING STATEMENT OF CHAIRMAN SHERROD BROWN

    Chairman Brown. The Banking, Housing, and Urban Affairs 
Committee will come to order. This hearing is in the virtual 
format. A few reminders as we begin. Sorry to those of you who 
have to hear this every hearing.
    Once you start speaking, there will be a slight delay 
before you are displayed on the screen. To minimize background 
noise, please click the mute button until it is your turn to 
speak or to ask questions.
    You should all have a little box on your screens labeled 
``Clock'' that will show you how much time is remaining. For 
witnesses, you will have 5 minutes for opening statements. For 
Senators, the 5-minute clock still applies to your questions.
    At 30 seconds remaining for your statements and questions, 
you will hear a bell ring to remind you your time has almost 
expired. It will ring again when your time has expired.
    If there is a technology issue, we will simply move to the 
next witness or the next Senator until it is resolved. And, 
fortunately, because of Cameron and Charlie's work, we rarely 
have technical problems, but one never knows. To simplify the 
speaking order process, Senator Toomey and I have agreed to go 
by seniority for this hearing.
    Last February, as the world came to the collective 
realization that we were confronting a global pandemic, the 
U.S. stock market suffered its fastest drop in history, 
plummeting, as we recall, 34 percent in 33 days.
    This was followed by the fastest stock market rebound in 
history, recovering all of those losses by mid-August.
    It was clear what most working people had suspected for a 
long time: The stock market is detached from the economy and 
the reality of most Americans' lives.
    The coronavirus was spreading, widespread testing was not 
available, and we did not know if the hope of a vaccine was 
months or, for that matter, years away.
    Unemployment soared, reaching 23 million jobs lost by 
April. Almost a year later, only about half of those jobs have 
been recovered. Families and small businesses had no certainty 
about what their lives would look like in a few weeks, let 
alone next year.
    But the stock market continued to go up and up. Those lucky 
enough to own investments reaped the profit.
    To some, this looked like a new development. But to 
millions of Americans, to millions of workers who have watched 
the stock market reach new heights while their own paychecks 
never kept up, it looked pretty familiar.
    Families have not been too surprised by this state of 
affairs. A whole lot of them never recovered from foreclosure 
or from losing their savings during the last crisis, but they 
watched Wall Street pocket its bailout and go on to record 
highs just a few short years later.
    That is because when you look at who truly benefits, it is 
clear that the stock market's gains funnel wealth to a tiny 
sliver of people, often at the direct expense of American 
workers. We discussed this last week in our hearing ``Wall 
Street vs. Workers.''
    According to Federal Reserve data, the wealthiest 1 percent 
hold 53 percent of stock and mutual fund investments. The 
bottom 90 percent own less than 12 percent.
    The bottom 90 percent own less than 12 percent.
    Between workplace retirement accounts and personal 
investments, about half of American households have at least 
one financial account tied to the market, but only one in six 
directly own stocks.
    None of this reflects the actual makeup of the country. 
Only 31 percent of Black families and 28 percent of Hispanic 
families own any stock investment.
    The wealthy are far more likely to have these accounts, of 
course, than middle-class families, who in turn are far more 
likely to be in the market than working-class families or poor 
families.
    So when the stock market soars, most people barely notice. 
They are just trying to keep up with the cost of living within 
their paychecks.
    In recent years, the growth of fintech in financial 
services has given rise to trading platforms that offer free 
stock trades. Firms like Robinhood and others claimed to 
``democratize'' stock trading with flashy marketing and easy-
to-use features.
    And in one sense, it worked. They attracted millions of 
customers, many of them young and new to investing.
    The frenzied stock trading this January, when shares of 
GameStop went from $18 to over $400 in a matter of weeks, 
showed how millions of retail investors could engage with each 
other and create a sort of sensation.
    But it also lays bare serious risks.
    There are real people who got caught up in the frenzy who 
suffered real consequences. If the people who are busy working, 
watching their kids, or living their lives cannot make sense of 
the stock market's booms and busts, they will continue to lose 
faith in the market. And hedge funds and insiders will continue 
to reap the vast majority of the profit.
    That is really bad for everyone in the long run.
    Robinhood tried to blame its decision to cutoff its 
customers from being able to purchase GameStop and other stocks 
on industry-wide standards for processing stock purchases. Of 
course, the SEC and others should examine and consider how to 
reduce risk in the financial system by cutting the time it 
takes to complete stock purchases. Everyone would benefit from 
that.
    But it has become clear that firms like Robinhood were 
founded on a model that exploits small investors by encouraging 
fast and loose trading, and then sells their trades to big 
market players.
    In a few short years, Robinhood violated the law, failed to 
respond to customers when they needed help, and when it got in 
trouble, cutoff customers to save itself. Robinhood attracted 
new customers to investing, encouraged them to trade, profited 
off of them, and then broke their trust--precisely when they 
needed the company to have their backs.
    It is also obvious that the David versus Goliath story--to 
mix metaphors, perhaps--we first heard in January was not the 
whole picture. Well-funded, sophisticated hedge funds made big 
profits alongside the people trading at home. We know they 
always had better access and information than any of us ever 
will. No one thinks that is fair.
    Some have tried to blame the small-time investors. They 
scold people just trying to make some extra money in the worst 
job market we have seen in most of our lifetimes.
    Because of the Robinhood business model and other reasons, 
we have all learned the new term ``gamification.''
    But let us be clear: We have seen Wall Street treat the 
markets as a game for decades--a game they always win, at the 
expense of pretty much everyone else.
    Wall Street has never been friendly to the little guy. 
Surely this time is no different.
    Yes, some regular people have had success. But, 
fundamentally, the system is set up to funnel more wealth to 
the already wealthy. Just like in Las Vegas, the house always 
wins.
    The economy and the markets should work for everyone, not 
just the well-connected. They should reflect the economy we all 
want--with broadly shared prosperity and a growing middle class 
that all workers have the opportunity to join.
    When that happens, people will have confidence the markets 
can actually work for them, not just Wall Street. We will see 
more Americans save and invest for the future.
    This hearing will examine not only the volatile activity in 
a dozen stocks early this year, but also the practices that 
encouraged that activity. We will see how it affects our 
economy in the long term. We will see who benefits and who 
loses from this ``tech-induced'' stock market volatility.
    I look forward to the testimony from all five of our 
witnesses.
    Senator Toomey.

         OPENING STATEMENT OF SENATOR PATRICK J. TOOMEY

    Senator Toomey. Thank you, Chairman Brown. Welcome to all 
of our witnesses.
    This January's volatility in the stock market 
understandably captured everybody's attention. We saw 
extraordinary trading volumes in GameStop and other stocks, and 
we also saw some brokers limit stock purchases during this 
period of volatility. So it is entirely appropriate to examine 
these events and try to understand what happened and whether 
any response is needed.
    However, I urge my colleagues and regulators to avoid any 
knee-jerk reaction to impose unnecessary restrictions and 
burdens on investors. We have yet to see any evidence of 
wrongdoing or that the regulatory regime failed to function as 
intended. And Congress and regulators should avoid new laws and 
regulations that could end up limiting investors' access to and 
choices in the stock market.
    One reason to tread cautiously is that new developments 
have made it a great time to be a retail investor. Today a 
person of modest means can invest in the stock market at zero 
or minimal cost. Two developments particular stand out: zero 
commission trading platforms with no minimum account balance 
required, and a user-friendly trading technology such as mobile 
apps. Zero commission trading is the culmination of a decline 
in investor costs since the SEC abolished fixed commissions in 
1975 and forced brokers to compete against each other.
    In the 1980s and 1990s, it could cost you close to $100 to 
buy several thousand dollars worth of stock. By the 2000s, 
online trading sites offered lower costs, but they could still 
cost you $30 for a trade. Competition from market makers allows 
brokers under their best execution obligation to obtain a 
better price for investors than current market price, even 
after receiving a payment for order flow, and they can charge 
zero to investors.
    Similarly, new technology like app-based trading platforms 
make it easier to access the market, including buying through 
fractional shares. And it is not just Robinhood attracting new 
investors. The Wall Street Journal reported that 2020, despite 
the volatility, was a record year for new individual accounts, 
and these developments have, of course, contributed to broader 
investment in the stock market.
    According to the Federal Reserve, in 1989, less than one-
third of U.S. households owned stocks. Three decades later, in 
2019, a majority of American households did. And the most rapid 
growth is among low- and middle-income households. Now, let us 
not forget about the millions of others, including police 
officers, firefighters, teachers, and other workers indirectly 
invested through pension funds.
    This allows everyone to share in the tremendous wealth 
gains generated by the stock market, which used to be available 
only to wealthy individuals and institutional investors.
    Despite these positive developments, some see the state of 
retail investing only in negative terms. Rather than 
celebrating the fact that it is cheaper and easier for average 
Americans to invest in the stock market, some claim that the 
market is somehow rigged against retail investors.
    So to my colleagues who say that, I would like to hear why 
they believe that. Does the retail investor not receive 
dividends like institutional investors do? Is the retail 
investor not entitled to best execution on trade like 
institutional investors? When a stock goes up in value, does 
the value of a retail investor's share not go up like wealthy 
individuals?
    Of course, the answer to all of these questions is 
obviously no. And if the market is rigged, then why did some 
hedge funds lost their shirts shorting GameStop while some 
retail investors hit pay dirt for buying it?
    I am also incredulous at the idea that it somehow hurts 
retail investors to have access to investing technologies that 
are inexpensive and pleasant and easy to use. Retail investing 
does not need to be expensive and miserable and difficult to 
experience, nor should we want it to be. I would like to see 
more U.S. households have the opportunity to benefit from the 
financial gains that are available through the stock market.
    Your average American does not need Big Government coming 
in to limit her access to and choices in the stock market. The 
fact is risk is a fundamental part of investing. All investors, 
whether they are small retail investors or big hedge funds, can 
gain or lose money by investing. But what we know is for sure 
over time long-term investors investing in U.S. stocks, it is 
the exact opposite of going to the casino. Investors win, and 
when you go to the casino, you lose. Investors in GameStop and 
a few other stocks took a lot of risk, but they represent a 
very, very small fraction of retail investors. And investors 
should understand that if they make a very risky investment, 
they might lose money. Those who bought GameStop at its high 
very likely lost money. I certainly hope they did not invest 
money they could not afford to lose, but it is not the 
Government's job to tell people which stocks they can and which 
they cannot buy.
    In my view, there is one action that regulators should 
pursue, and Chairman Brown alluded to this, and that is to 
finish the work that it started in 2004 for a faster settlement 
cycle, including same-day cycle or maybe even real-time 
settlement. A faster settlement cycle will reduce risks for 
clearing agencies because there will be fewer unsettled trades 
and a reduced time period of exposure. And a faster settlement 
cycle will also require less collateral for clearing agencies, 
which may reduce margin charges and other fees that are 
inevitably passed on to investors.
    When the SEC moved to T+2 back in 2017, the SEC said it 
wanted to make settlement even faster, and last month, Ranking 
Member McHenry from the House and I wrote to the SEC asking 
that they follow through on this longstanding objective.
    Let me close by just repeating: I think Congress and the 
regulators should tread very cautiously here. We should want to 
make sure that all parts of American society can participate 
and share in the gains of the stock market, and we should avoid 
taking actions that would undermine that goal.
    I look forward to today's testimony.
    Chairman Brown. Thank you, Ranking Member Toomey.
    I will introduce today's five witnesses. Gina-Gail 
Fletcher, professor of law at the Duke University School of 
law. Professor Fletcher is a scholar of complex financial 
instruments and market regulation. Her research focuses on the 
interplay of public regulations and private ordering in 
enhancing market stability and integrity. Welcome, Professor 
Fletcher.
    Rachel Robasciotti is the founder and chief executive 
officer of Adasina Social Capital, an investment firm that 
seeks to serve as a bridge between financial markets and social 
justice movements. Welcome, Ms. Robasciotti.
    Dr. Teresa Ghilarducci is an economist, nationally 
recognized expert in retirement security. Dr. Ghilarducci holds 
the Irene and Bernard Schwartz Chair in Economic Policy 
Analysis in the Economics Department at The New School for 
Social Research. She directs the Schwartz Center for Economic 
Policy Analysis that focuses on economic policy research and 
outreach. Welcome, Dr. Ghilarducci.
    Commissioner Michael Piwowar is the executive director of 
the Milken Institute Center for Financial Markets. Commissioner 
Piwowar served as a Commissioner at the U.S. Securities and 
Exchange Commission from August of 2013 to July of 2018 and was 
Acting Chair from January to May 2017. Previously, he was the 
Republican Chief Economist for the
    U.S. Senate Committee on Banking, Housing, and Urban 
Affairs under Senators Crapo and Shelby. Welcome back, 
Commissioner Piwowar.
    Andrew Vollmer is a senior affiliated scholar with the 
Mercatus Center at George Mason university. From 2014 to 2019, 
he taught securities regulation. He is the director of the John 
W. Glynn, Jr. Law & Business Program at the University of 
Virginia School of Law. Prior to that, Mr. Vollmer was a 
partner in the securities litigation and enforcement practice 
at Wilmer Cutler Pickering Hale and Dorr, and he also served as 
Deputy General Counsel at the SEC from 2006 to early 2009. 
Welcome, Mr. Vollmer, to our Committee.
    Professor Fletcher, would you begin your testimony,please, 
for 5 minutes? Thank you.

  STATEMENT OF GINA-GAIL S. FLETCHER, PROFESSOR OF LAW, DUKE 
                    UNIVERSITY SCHOOL OF LAW

    Ms. Fletcher. Chairman Brown, Ranking Member Toomey, 
Committee Members, thank you for inviting me to testify today. 
I am a professor of law at Duke University, where my research 
focuses on capital markets, financial regulation, and market 
manipulation.
    Our capital markets exist to channel investors' capital 
into its best uses, ideally forming companies to increase sales 
and create jobs, but also providing investors with reasonable 
returns, allowing them to save for retirement or to send their 
children to college.
    We are here today because we are seeing trading activity 
that seems to be divorced from this essential purpose. Since 
the start of the year, GameStop's stock has gone through quite 
a bit of volatility. It started at a little under $20 a share 
at the beginning of the year, went up to $400, down to $40, and 
now as of yesterday was a little bit under $200 per share, all 
of this occurring over just a few weeks.
    As the company's stock price yo-yos back and forth, it is 
clearly not a good-faith reflection of the fundamental value of 
a company with real stores, employees, and sales. The 
volatility in GameStop's stock is just one of a growing number 
of examples of market price gyrations which seem to be 
impacting not only meme stocks but also some penny stocks, 
special purpose acquisition companies, and even 
cryptocurrencies.
    Financial innovation has made it easier than ever for 
retail investors to trade more complex, leveraged, and risky 
assets than ever before. These developments have generally 
expanded retail participation in the markets, and in some ways 
this is great. For example, a recent study has estimated that 
the racial gap in individual stock ownership has been halved in 
less than 5 years because of greater lower-cost market access. 
However, recent market events have raised questions about the 
integrity and long-term stability of the markets.
    Now, while my written remarks cover several topics, I wish 
to highlight a few key points here.
    First, to the extent that asset values are subject to wild 
swings and are divorced from any semblance of fair market 
values, market participants will increasingly view the markets 
as rigged and unreliable. This will in the long run deter 
investment and harm our economy.
    Second, Congress and regulators should act to ensure that 
those who deliberately distort prices may be subject to 
regulatory or prosecutorial discipline.
    Third, Congress and regulators should address the 
incentives and market structures that have created the modern 
trading markets. This includes the proliferation of payment for 
order flow practices, the segmentation of retail orders, and 
the overall impact on trading costs for all investors, not just 
retail investors but pension funds and other institutional 
investors. It is clear that retail brokers and market makers 
are making quite a bit of money from these practices, but it is 
also increasingly clear that retail and institutional investors 
are paying the price.
    Fourth, Congress and regulators should review whether and 
how investors should access complex leveraged products, such as 
call options. Opening options trading accounts used to take 
weeks, and still does with some brokers. Yet it may take just a 
few minutes with other brokers. It should not take a suicide 
for us to realize that many investors in current markets do not 
fully comprehend the products that they are trading or the 
risks that they are taking.
    Fifth, finally, and perhaps most importantly, Congress and 
regulators must acknowledge that events like what we are seeing 
with GameStop and other assets are no longer outlier events, 
but are instead regular features of our current system. Unless 
action is taken, these events will continue to expand and 
evolve. This means that brokers need to be better prepared to 
stand behind their customers' risky trading, and to the extent 
brokers cannot, the answer ought not to lie with limiting 
retail participation, as seems to have happened recently when 
some broker-dealers suspended trading in highly volatile 
stocks.
    Additionally, regulators should consider shortening the 
settlement cycle so that fewer things can go wrong between the 
time of trade execution and when parties match up securities 
and cash.
    Today it is easier, cheaper, and faster to trade more 
complex and leveraged financial products than ever before. This 
new market reality requires that we rethink the risks that 
accompany these developments and in so doing consider how to 
create a market that is fair, accessible, and stable for 
investors and the rest of the economy.
    Thank you.
    Chairman Brown. Sorry, I was having trouble with the mute. 
Thank you, Professor Fletcher.
    Welcome, Ms. Robasciotti. Speak for 5 minutes. Thank you.

STATEMENT OF RACHEL J. ROBASCIOTTI, FOUNDER AND CHIEF EXECUTIVE 
                OFFICER, ADASINA SOCIAL CAPITAL

    Ms. Robasciotti. Mr. Chairman Brown, Ranking Member Toomey, 
and Members of the Committee, good morning, and thank you for 
inviting me to testify before this Committee. It is my great 
honor.
    My name is Rachel Robasciotti, and I hold leadership 
positions at two SEC Registered Investment Advisory firms. I am 
the founder and CEO of Adasina Social Capital, where we manage 
an exchange-traded fund with the ticker symbol JSTC. It holds 
over 800 stocks and is accessible to everyday investors at a 
price of about $16 per share. I am also the director of 
advocacy and engagement for Abacus Wealth Partners, which is a 
firm with $3.8 billion in assets under management but no 
minimum account size for its clients.
    I serve hardworking, everyday Americans, so your 
constituents and my clients are the same people.
    I have worked in financial services for almost 22 years, so 
I take the long view of market events, and I have seen 
everything from the ill-fated dot-com boom of 2000 through the 
Great Recession and the most recent GameStop-Robinhood episode 
in January and February. So I understand the players in the 
market, and in this most recent situation, there are really 
three groups for us to consider.
    First is the hedge funds. These are institutions that 
primarily manage money for the wealthy, accredited investors, 
and they are known for their risky strategies and high returns.
    Two, the Redditors, these tech-enabled young people who use 
commission-free trading and banded together to outwit the hedge 
funds they felt had an unfair advantage.
    Third--and these are the folks that I am here for today--
are the everyday Americans, hardworking people with long-term 
retirement savings invested in the stock market. These people 
rely on Government institutions and financial professionals to 
look out for them.
    When the GameStop-Robinhood episode occurred in January, I 
was immediately reminded of the MIT Blackjack Team of the 
1990s, when a group of students banded together to break the 
bank at several large casinos. They realized that if they 
worked together, they could win substantially more money than 
the average gambler. So using their math skills and their 
technology, they coordinated to quickly and strategically place 
large bets against the house.
    It is pretty easy to see the obvious similarities between 
the two situations. Like the MIT students, the Redditors in 
January were young, knowledgeable people with high appetites 
for risk who chose to collectively speculate by making quick 
bets against a larger player with a perceived advantage.
    On the other hand, like the casino owners, the hedge funds 
are these large institutions with specialized knowledge about 
the game who some say routinely use their size to tip the odds 
in their favor.
    What is not obvious, whether in the casino or in the stock 
market, is what the wealthy institutions and upstarts have in 
common. They are all fast-moving, high-risk speculators with 
more skills and tools than the average person.
    But there is a problem here for the stock market, which is 
supposed to be a place where a person can grow wealth by 
investing in companies that have good prospects. But when fast-
moving, high-risk speculators dominate, we have a classic 
recipe for market disruptions. What we saw in January with 
GameStop and Robinhood is what we saw during the Great 
Recession with Wall Street churning out subprime, mortgage-
backed securities.
    Market disruptions like this are a problem because, as 
stated by SEC Commissioners in January, `` . . . extreme stock 
price volatility has the potential to expose investors to rapid 
and severe losses and undermine market confidence.''
    Now, unfortunately, this volatility does not impact 
everyone equally, and let me paint the picture of what the 
everyday investor experienced. Imagine a two-job household with 
a couple of kids, adults working hard to make ends meet and 
save enough for the future. They do not have a pension to fall 
back on for retirement because so few pensions now exist. They 
know that Social Security benefits their parents receive are 
not enough to cover most retirees' basic needs. And for several 
decades now--and this is key--the economy has only offered 
these savers historically low interest rates, which means that 
putting their money in low-risk savings accounts, CDs, or bonds 
barely makes them enough to keep up with inflation.
    This leaves investing in the stock market as their only 
option. It is the only way their savings can grow enough to 
provide for the future. So they are forced into the ``stock 
market casino'' with their life savings. And they are required 
to play against armies of sophisticated, high-risk hedge funds 
and Redditors duking it out for dominance. For everyday 
Americans with smaller amounts that represent all that they 
have to invest, sustaining significant losses--or even the 
perception of losses--is devastating. It makes them lose 
confidence and want to opt out altogether. But we know they 
cannot leave the casino.
    As an investment professional who works for everyday 
investors, and as Senators with these same people as your 
constituents, we must fix the system for them. We need to 
maintain fair, orderly, and efficient markets that serve as a 
reasonable place for the average American to invest their life 
savings. And we have a duty to protect these investors from the 
crossfire of fast-moving, high-risk speculators.
    Chairman Brown. Thank you, Ms. Robasciotti.
    Ms. Ghilarducci.

STATEMENT OF TERESA GHILARDUCCI, BERNARD L. AND IRENE SCHWARTZ 
             PROFESSOR OF ECONOMICS, THE NEW SCHOOL

    Ms. Ghilarducci. Hello. Thank you for inviting me, Chairman 
Brown and Ranking Member Toomey, and hello to the Members of 
the Committee.
    I am a professor of economics at The New School. I teach 
behavioral finance and labor markets. I also taught at the 
University of Notre Dame for 25 years. I received my Ph.D. from 
UC Berkeley, and I have published four books on how workers 
acquire wealth. The latest one was ``Rescuing Retirement'' with 
my co-author Tony James.
    I also am a court-appointed trustee overseeing $60 billion 
of the retiree health care trust fund money for auto workers, 
and that money is invested to last over 80 years.
    Now, as a professor, my office hours are typically quiet 
moments huddled over equations and numbers. But over the past 
few years, I have seen another trend. Students are coming to me 
bubbly because they want to know about trading on their phone 
app, Robinhood. Now, the young are told to buy stocks and they 
are told to hold them, but these students have absorbed the 
first point but they have not absorbed the second.
    Trading on Robinhood is a game, and it has psychologically 
powerful intermittent rewards. The trading is disconnected from 
long-term wealth accumulation. Phone apps makes trading easy, 
and they are cheaper, and superficially they seem to open 
securities markets to many more people. But trading apps do not 
produce wealth.
    I welcome today's hearing seeking to protect retail stock 
buyers, seeking to protect my students. And I am here to 
testify where Americans really get their wealth.
    So I am going to huddle over a few numbers in the next few 
minutes, and I draw my data from the gold-plated data from the 
University of Michigan, the Health and Retirement Survey, and I 
am looking at households where people are still working, they 
are over the age of 52. They have gone through their life 
cycle. They have accumulated their wealth, and we are going to 
take a snapshot of what their wealth looks like.
    So averages hide differences, so I am going to report my 
numbers in terms of the bottom half of the wealth distribution, 
the middle class and the next 40 percent, and what the top 10 
percent of the wealth distribution have.
    Now, you probably have already guessed that home equity, 
the net wealth from their homes, and retirement wealth, 
including Social Security, are by far the largest component of 
wealth for everybody. Those components make up 88 percent of 
the wealth held by households in the lower half of the wealth 
distribution, 78 percent for the middle class, and 43 percent 
for those in the top 10 percent.
    I am going to make a side track note to note what Social 
Security means to households. I am always surprised to see that 
Social Security is the most important source of wealth for 
households nearing retirement.
    In contrast to home equity, retirement wealth, and Social 
Security, directly owned stocks and bonds make up a small share 
of these households' wealth. The average is only 8 percent. 
Only 24 percent of older households own stocks directly, 
outside of their retirement accounts, and that ownership, that 
24 percent, is concentrated way at the top. Only 10 percent of 
people below the median own stocks directly, and it is a small 
amount, and less than a third of the middle class owns stocks 
directly.
    And the wealthy, 70 percent of them do own stocks directly 
outside of their retirement wealth. But it is only 13 percent 
of their wealth.
    As Nobel Prize winner Robert Shiller the economist's recent 
book just points out, stock trading feeds a narrative. It feeds 
a story about wealth. Stories about getting rich on stocks 
produce a fiction that stock trading creates wealth, when, in 
fact, retail investors fuel bubbles, as the witnesses have 
testified to.
    Defenders of Robinhood and widespread trading have purchase 
because the COVID recession has produced wealthy people who 
have gotten wealth. Their gains heighten the fear of missing 
out, or FOMO. The reality is that most Americans are being left 
out because they do not have access to retirement accounts, 
which is where most of us who own stocks. Retirement accounts 
are invested in diversified portfolios managed by institutional 
investors and professionals. It is those professionals that can 
handle the complex instruments for investments, and it is those 
professionals that accumulate savings, hard-earned savings by 
workers, and invest them in diversified portfolios.
    We need innovations in public policy to give more Americans 
access to what we know works: professionally managed retirement 
coverage that allows everyone to benefit from the stock markets 
the same way you and I do in the Thrift Savings Plan, in 
private or public defined benefit plans--as Senator Toomey 
mentioned, the firefighters and the teachers--or in my pension 
plan, the Teachers Insurance Annuity Association. We all need a 
piece of diversified, well-managed, professional accounts.
    Thank you very much.
    Chairman Brown. Thank you, Dr. Ghilarducci.
    Commissioner Piwowar, please proceed for 5 minutes.
    Thank you.

  STATEMENT OF MICHAEL S. PIWOWAR, EXECUTIVE DIRECTOR, MILKEN 
             INSTITUTE CENTER FOR FINANCIAL MARKETS

    Mr. Piwowar. Good morning. Thank you, Chairman Brown, 
Ranking Member Toomey, and members of the Committee for 
inviting me to testify today.
    My name is Mike Piwowar, and I am the executive director of 
the Milken Institute Center for Financial Markets. I had the 
pleasure of serving on this Committee's staff as Republican 
Chief Economist for Senator Shelby and Senator Crapo. I also 
served as a Visiting Academic Scholar, Senior Financial 
Economist, Commissioner, and Acting Chairman of the Securities 
and Exchange Commission.
    I am glad you called this hearing today on the state of 
retail investing. As we have heard, on the one hand, retail 
investors have never had it better. They enjoy more choices and 
face lower costs when investing their hard-earned savings than 
ever before. They can invest directly in securities through 
brokerage accountable, and competition among brokers has led to 
commission-free trading. Competition among exchanges, 
alternative trading systems, and market makers has led to the 
best market quality environment for publicly traded securities 
in history. Transaction costs are low, market depth is high, 
and execution speeds are fast. Retail investors can make their 
own investment decisions, or they can seek the advice of well-
regulated investment professionals through a broker-dealer or 
investment adviser.
    Alternative, they can achieve low-cost diversification and 
professional management by indirectly investing in the stock 
market through passively and actively managed mutual funds and 
exchange-traded funds. Competition among these funds has 
brought fees and expenses down to their lowest levels in 
history. The availability of retirement savings accounts such 
as 401(k) plans and individual retirement accounts also allows 
low-cost access to the stock market.
    Now, retail investors have taken advantage of these 
beneficial trends over the past few decades. As Senator Toomey, 
mentioned, the percentage of U.S. households that own stocks--
directly or indirectly--increased from 32 percent in 1989 to 53 
percent in 2019. Now, low-income households saw the biggest 
gains over the period, but they still lag high-income 
households in public stock ownership rates.
    Now, as we have also heard, on the other hand, the January 
trading frenzy in GameStop and other meme stocks and the 
related difficulties faced by some brokerage customers 
highlighted a few areas that require the SEC's and this 
Committee's immediate attention.
    Now, the SEC has already said that they are reviewing 
actions taken by regulated entities to determine whether they 
may have disadvantaged investors or otherwise unduly inhibited 
their ability to trade certain securities. The SEC has also 
said they are investigating whether abusive or manipulative 
trading activity prohibited by the Federal securities laws 
occurred during this episode.
    Having worked at the Commission for the better part of my 
career, I have complete confidence that the Commission and the 
staff will identify and pursue any evidence of noncompliance or 
wrongdoing. Accordingly, I focus my testimony on the market 
structure and infrastructure policy issues that have been 
raised in the aftermath of the January trading.
    In summary, I recommend that the SEC should: one, evaluate 
whether and how to move to a shorter trade settlement cycle; 
two, study how payment for order flow is working in a zero 
commission environment with a focus on order routing and best 
execution requirements; three, evaluate various alternatives to 
increase regulatory reporting and public transparency in 
securities lending; and, four, consider amending the accredited 
investor definition to achieve more equitable access to 
investing in private companies across all income levels.
    Now, my written testimony provides an in-depth discussion 
of each of these issues, and I am happy to answer any questions 
you may have.
    Thank you for bringing attention to these critical issues 
and for the opportunity to testify here today.
    Chairman Brown. Thank you, Commissioner Piwowar, and 
welcome back again to the Committee.
    Mr. Vollmer, you are recognized for 5 minutes. Thank you 
for joining us.

  STATEMENT OF ANDREW N. VOLLMER, SENIOR AFFILIATED SCHOLAR, 
           MERCATUS CENTER AT GEORGE MASON UNIVERSITY

    Mr. Vollmer. Well, thank you for inviting me, Chairman 
Brown, and to you and Ranking Member Toomey and the Members of 
the Committee, good morning.
    My written statement makes three points, and I end with my 
view that what we know so far about the events surrounding the 
GameStop trading does not provide a sufficient basis for new 
legislation or regulation.
    So the first topic I cover is the trading in GameStop by 
the users of the WallStreetBets social media forum. Based on 
the public information I have seen, misconduct probably did not 
occur in the trading of GameStop. The SEC is investigating, but 
my understanding is that the main group of individuals trading 
GameStop did not make material false or misleading statements 
to the securities markets and were not deceived by others.
    Another concern has been whether a securities manipulation 
occurred. The leading definition of securities manipulation, 
which comes from the Supreme Court, is securities trading that 
is artificial or not genuine. The traders using the 
WallStreetBets site actually bought GameStop and the other 
stocks and, therefore, did not engage in a manipulation.
    Let us look at the effects of the GameStop trading on the 
larger secondary markets for securities. At the moment, those 
effects do not appear to be widespread or severe. The trading 
activity in GameStop, AMC, and the other securities was limited 
to a few companies and was short term. Some investors made 
money in GameStop, and some lost money.
    Overall, at least so far, we have not seen strong evidence 
of securities violations or harm to the markets for buying and 
selling equities on stock exchanges. There have been some 
questions about short sales, and I hope we are able to get into 
that topic during the questioning.
    My second point in my written statement, I discuss the role 
of the broker-dealer Robinhood. It has come under scrutiny 
because of the WallStreetBets traders using it and because it 
has certain features that make buying and selling securities 
easier and more attractive, like commission-free trades or 
accounts with no minimum dollar amounts.
    The criticisms of Robinhood fail to give appropriate weight 
to the benefits of its business model. The Robinhood brokerage 
service is innovative, and it makes significant positive 
contributions to society and the economy. It reduces costs for 
consumers, makes securities trading simpler and easier. It 
increases consumer choice and lowers barriers to participation 
in the market for the common stock of companies listed on stock 
exchanges. It, therefore, opens the securities markets and 
equity securities ownership to a much larger part of the 
population and to people with less income and wealth than are 
typically associated with participation in the equity markets. 
That is all to the good and serves a variety of goals that I 
have heard from everyone who is participating in this hearing.
    My final point is that the information currently available 
has not revealed a problem of sufficient severity to justify 
Congress imposing new regulations in these areas. New 
information could change that, but any deliberations about 
possible additional legal restrictions Congress should give 
weight to and respect the personal liberty interests involved. 
I have not heard individual civil liberty mentioned as a factor 
so far today, but I think individual liberty is an important 
tradition in our country, and Congress should not restrain 
personal freedom unless it has a strong reason.
    That is a summary of my written statement. I would be happy 
to answer questions.
    Chairman Brown. Thank you very much, Mr. Vollmer. I thank 
all five witnesses.
    I will start with Ms. Robasciotti. Why do people get 
discouraged even as some stocks are going up? Do people think 
the market is fair? What are you hearing from your clients?
    Ms. Robasciotti. You know, we hear from our clients 
regularly. They ask us literally the casino question, like is 
it actually the best way for me to save long term? And what you 
and I know is that they do not have any other options if we are 
going to outstrip inflation. And so I do see, particularly in 
the younger generation, an increasing set of people that do not 
want to participate in financial markets specifically because 
they do not see them as fair or efficient.
    Chairman Brown. OK. Thank you.
    Professor Ghilarducci, the research on stock ownership 
shows, as you pointed out--and those numbers were helpful--that 
half of U.S. households are investing in the market; many are 
not. I appreciated your recounting where people's wealth--how 
people hold their wealth and home equity and Social Security, 
and that is the preponderance of wealth for most people. How 
does the fixation on Wall Street and stock market performance 
distract us from the actual economic reality for most families?
    Ms. Ghilarducci. As I said, I teach behavioral economics, 
and psychologically, we are wired to look at the most recent 
events, and when people get rich around us, who are much 
richer, we see them through the lens of the media, we feel that 
we are afraid, and fear actually causes anxiety and might cause 
pulling back. It might cause coming back in. And it fuels 
bubbles. And as Robert Shiller's great new book says, it 
produces a narrative about economics and a narrative is a 
fiction. Stockholdings, direct stockholdings, does not create 
wealth, and I really appreciate what Rachel said, that we wish 
we had a better option. I wish everybody could be in the kinds 
of funds that we are in. But they will not get that by directly 
trading stocks.
    I hope I answered your question.
    Chairman Brown. You did. Professor Fletcher, Robinhood and 
others brokers' business models based on selling customers' 
orders to large trading firms and receiving so-called payment 
for order flow, if these intermediaries are willing to pay 
brokers and provide them a service, it suggests they are 
getting a better deal than the broker's customers, the retail 
customers.
    Explain why these conflicts are so problematic.
    Ms. Fletcher. Thank you, Senator Brown. So payment for 
order flow, just as you explained, allows some brokers to say 
that they are operating zero-commission trading to retail 
investors, and these commissions are then being subsidized by 
wholesalers. But the payment for order flow model undermines 
the relationship between a broker and their client because it 
pits the broker's primary revenue source directly against the 
clients to whom they owe a duty of best execution.
    So under the payment for order flow model, brokers are 
incentivized to put their own profit-seeking interests above 
their clients' in deciding where to route orders, and this 
greatly undermines the broker-investor relationship, likely 
leaving retail investors in a worse position.
    Chairman Brown. Thank you, Professor Fletcher.
    Commissioner Piwowar, I appreciate your work at the SEC in 
2017 with Commissioner Stein to reduce the time it takes to 
complete stock transactions, reduce risk in the system. Ranking 
Member Toomey commented on that, too. Robinhood has suggested 
real-time settlement as a solution to the difficulties it had 
in January.
    Is that realistic? What other changes would be necessary? 
Comment on that, if you would.
    Mr. Piwowar. Thank you, Senator Brown, for that question. 
And as you pointed out, the move toward shorter trade 
settlements, like in 2017 from T+3 to T+2 was overwhelmingly 
bipartisan at the time. There were two of us at the 
Commission--Commissioner Kara Stein, who used to work for 
Senator Reed, who is on this, and myself. It was one that we 
viewed as a slam dunk to move to T+2.
    For reasons I stated in my testimony, I think the SEC 
should absolutely consider moving to T+1. I am happy to go into 
these details. But you asked me about real-time settlement. I 
think that is a bridge too far at this particular point in 
time. As we shorten the trade settlement cycle, we reduce risks 
like market risk, liquidity risk, and systemic risk, but we 
also have the opportunity--or we have the challenge of 
increasing operational risk.
    In order for real-time settlement to work, everything has 
to work perfectly all the time, and it is important to remember 
that the trade settlement cycle for securities does not operate 
in isolation. We also have to make sure the cash gets there, 
and that brings into account banking payment systems; it brings 
into account foreign exchange settlements systems for cross-
border transactions; and all of those have to be calibrated to 
make sure that it works perfectly.
    And so at this point, I think absolutely the SEC should 
look at shortening the trade settlement cycle, perhaps as one, 
but I think real-time settlement is just a bridge too far at 
this point.
    Chairman Brown. Thank you, Commissioner.
    Ranking Member Toomey.
    Senator Toomey. Thank you, Mr. Chairman.
    Dr. Piwowar, you know, when I graduated from high school in 
1980, the Dow Jones Industrial Average had a low that year of 
759, and it traded at a high of about 1,000. The last time I 
checked this morning, the Dow was at 32,000. And I guess my 
question for you is: If a retail investor took whatever amount 
of savings he or she could and regularly invested in a broadly 
diversified portfolio through whichever mechanism, and did that 
over these last 40 years, is it likely that that investor would 
have earned very substantial returns on those investments? Or 
is it more accurate to think of the stock market as a zero-sum 
casino where that middle-income American is going to lose 
because there is a hedge fund out there somewhere that wins?
    Mr. Piwowar. Yeah, thank you for that question, Senator. As 
Andy Vollmer pointed out in his testimony, the returns that 
retail investors get from long-term investing is exactly the 
same as an institutional investor who invests in the exact same 
securities. And what we know for long holding periods is that, 
you know, on average, the stock market tends to go up.
    There are daily fluctuations, there are minute-by-minute 
fluctuations in individual securities, but what we know is that 
retail investors who hold diversified positions in low-cost 
mutual funds and other mechanisms over long periods of time 
will do quite well in increasing their wealth.
    Senator Toomey. And those low-cost options are lower in 
cost and more available today than ever before. Isn't that 
true?
    Mr. Piwowar. That is correct. You know, since the time that 
you graduated in 1980, not only do investors have the 
opportunity to invest in open-end mutual funds, but a new 
innovation, exchange-traded funds, has entered the landscape 
and has brought incredible competition to this industry and 
brought fees and expenses to their lowest rates in history.
    Senator Toomey. Right. A quickly follow-up on the faster 
settlement cycle. I understood you to say that there might be 
some challenges, technical challenges, in real-time settlement. 
But would you distinguish between real-time settlement and 
same-day settlement? And do you think that it is feasible to 
move to same-day settlement? Or do you think we really should 
be happy with T+1 rather than the T+2 we have today?
    Mr. Piwowar. Thank you for that question. First of all, I 
think what the SEC should do, which is what we did when we 
evaluated moving from T+3 to figure out should we go to 2, to 
1, or real-time settlement, was we took a look at the way the 
world existed in terms of the markets and technologies 4 years 
ago, and we said let us look at it on a cost-benefit analysis. 
And we said, all right, in terms of moving from 3, do we get 
any benefits? And what are the costs from going to 2 to 1 or 
real-time settlement?
    At that time, 2 was the clear winner. What we heard from 
the industry was that the cost would be low. It would be pretty 
much speeding up existing back-office products. Then we heard 
from buy side, sell side, the clearinghouse, exchanges, even 
retail investor brokers and securities traders.
    Moving to 1 had additional challenges. Not only the costs 
were higher, but as I mentioned in answer to Chairman Brown, 
you have to get the bank regulators involved to make sure that 
all the bank payment systems also line up so that you make sure 
that they settle correctly.
    Moving to zero, you know, at that time, whenever we asked 
people, said, ``Well, how do you get to real-time settlement?'' 
and the answer was always, ``Blockchain.'' And we said, ``Well, 
can you explain how that workers?'' And they would just repeat 
back louder, ``Blockchain.''
    And so we may get to a point where blockchain technology or 
digital ledger technology gets us to a point where we can 
achieve real-time settlement, but I do not think we are there 
just yet. That is just my opinion.
    What I think the SEC should do is put out for public 
comment a rule proposal proposing to move to a shorter trade 
settlement cycle and put it out for public comment and evaluate 
the costs and benefits.
    Senator Toomey. Thanks. And, Mr. Chairman, if I have time 
for one more quick question?
    Chairman Brown. Yes, proceed.
    Senator Toomey. Mr. Vollmer, recently the CEO of Robinhood 
testified that the restrictions that they imposed on purchasing 
GameStop and a few other stocks were driven by margin 
requirements required by the DTCC in compliance with the SEC's 
capital rule. So two questions.
    One, is that a plausible explanation in your mind for the 
restrictions they put in place? And, two, is it really optimal 
to have the opacity about how those capital rules work that 
prevent us from knowing clearly in advance exactly what they 
are?
    Mr. Vollmer. Thank you, Senator Toomey. I think the 
explanation that I heard from the CEO sounded reasonable. The 
collateral call from DTCC was sudden and in a large amount. 
That took Robinhood by surprise and caused them to impose 
trading restrictions. By the way, the trading restrictions were 
only one way, only on buys, not on sells. So customers could 
sell. They entered into the discussions. They talked to DTCC. 
They reduced the collateral call because they had imposed these 
trading restrictions.
    The SEC is in a position to look at these areas to see if 
the process could be improved and smooth, because I agree with 
the theme in your question, and that is, I do not think either 
Robinhood or the customers should have been taken by surprise 
quite as much as they were, and if there is a way that we could 
smooth that out, I think that would be better for the broker-
dealers and better for the markets.
    Senator Toomey. Thank you very much.
    Thank you, Mr. Chairman.
    Chairman Brown. Thank you, Senator Toomey.
    Senator Menendez is recognized.
    Senator Menendez. Thank you, Mr. Chairman.
    Dr. Fletcher, I want to follow up on the questions that the 
Chairman raised with you in terms of order flow issues. Doesn't 
it create a conflict of interest or at least an appearance of a 
conflict when a broker receives a payment from a third party--
in this case, a market maker--to fulfill their customers' 
orders?
    Ms. Fletcher. Thank you for that question, Senator. Yes, it 
absolutely creates that conflict of interest because brokers 
are now--with this payment for order flow model, brokers are 
incentivized to put their own profit-seeking interests above 
the interests of customers when deciding where or how to route 
these orders.
    This also should raise concerns for us in terms of 
customers being able to get the best execution from their 
brokers. And so, yes, I agree with your question that this does 
raise these questions for us.
    Senator Menendez. And so how does an investor know that 
their broker is working to find the best execution quality for 
their investor, not simply working with the market maker that 
pays them the most?
    Ms. Fletcher. So currently under SEC rules, there are some 
disclosure out--there are disclosure obligations on retail 
brokers to state what their price improvement is from having 
routed their orders through different--to different wholesalers 
or market makers. But the retail investor really has very 
little information in terms of knowing the price at which their 
order is executed or what exactly that price improvement was. 
So retail investors do have less information, and so we do need 
more or better disclosure for retail investors to be able to 
evaluate this information.
    Senator Menendez. Are there other costs that payment for 
order flow imposes on investors?
    Ms. Fletcher. One of the things that we want to probably be 
thinking about with regards to payment for order flow is 
whether or not retail investors are truly receiving a best 
execution when they are trading, meaning if there are quotes 
that are--so, for example, there are quotes that are available 
that are odd lot quotes that are typically not included when we 
think about what the best price is available for an order. And 
right now one of the things that I would recommend is that the 
SEC think about amending some of their rules to include these 
odd lot quotes such that truly the best price available is 
included when we think about the execution of more retail 
investor orders.
    Senator Menendez. Thank you. I would like to turn our 
attention to racial inequity in the stock market. Historically, 
stock ownership has been dominated by white Americans. 
According to the Federal Reserve, in 2019, only 34 percent of 
Black families and 24 percent of Hispanic families owned any 
equities compared to nearly 61 percent of white families. This 
disparity only grows larger when you look at the value of 
equities held. Among families with equity, the typical white 
family has over $50,000 in holdings compared to just over 
$14,000 for a typical Black or Hispanic family.
    These equities represent funds that families can tap into 
in emergencies such as the pandemic. We have ample data showing 
that the pandemic is having a disproportionate effect on 
minority families, and the lack of savings is one reason why.
    Dr. Ghilarducci, what are the consequences of 
disproportionately low participation in the stock market by 
Black and Hispanic families? And what are some of the 
challenges holding back minority families from owning equities?
    Ms. Ghilarducci. Thank you so much for that question. A lot 
of my research at Notre Dame has been on non-white families 
with anthropologists exactly exploring that question.
    What holds non-white families, Blacks and Hispanics, from 
having wealth is not having access to a retirement plan at 
work. Wherever these families have significant holdings, 
meaningful holdings in stocks and bonds and private equity and 
the kind of wealth that we have because we are workers who have 
a retirement plan at work, they do not have because of their 
workplaces. So if we worked to expand retirement coverage to 
all workers through an innovative pensions-for-all plan, they 
would have less.
    Senator Menendez. One last question, Dr. Ghilarducci. Is 
the lack of stock ownership among minority families an 
impending factor in their ability to build wealth?
    Ms. Ghilarducci. Absolutely. They need Social Security, 
they need home equity, and they need access to financial 
instruments, but through professionally managed funds, not 
through trading on their phone.
    Senator Menendez. OK. Thank you very much.
    Chairman Brown. Senator Shelby from Alabama is recognized 
for 5 minutes.
    Senator Shelby. Thank you, Mr. Chairman.
    I want to take a second here and welcome again Dr. Piwowar 
back to the Committee where he spent a number of years before 
he was a member of the Securities and Exchange Commission 
itself. Thank you for being here with us today.
    I have a question for you following up on the area that 
Senator Toomey was involved in. I have always asked about cost-
benefit analysis, how important that is when you are dealing 
with a new regulation or a proposed regulation. What has the 
SEC adopted a number of years ago and what do they do today 
when they are looking at a regulation, Dr. Piwowar?
    Mr. Piwowar. Thank you, Senator Shelby, for that question, 
and thank you for your warm welcome back to the Committee. It 
is great to see you and the other members of the Committee 
again.
    I think you are referring to the current guidance in 
economic analysis----
    Senator Shelby. Absolutely.
    Mr. Piwowar. ----that the Commission adopted in 2012. So 
then-SEC Chairman Mary Schapiro decided to enhance the role of 
economic analysis at the Commission. It was due in response to 
a couple things.
    One, the Commission had lost some well-publicized cases in 
the courts for not following--doing proper cost-benefit 
analysis in accordance with the Administrative Procedures Act 
and some of their own statutory requirements. And, two, part of 
it was your leadership in terms of making sure that as the 
regulator implemented the various Dodd-Frank provisions, that 
they were doing cost-benefit analysis to evaluate how they were 
going to move forward.
    What the guidance did was essentially give the Chief 
Economist at the Commission more authority over the rulemaking 
process, got the economists involved earlier in the rulemaking 
process to help standardize how they think through the rules. 
And so what it does is it forces the Commission to go through a 
very important exercise of saying, all right, what is the 
justification of why you are thinking about going forward? It 
could be a mandate from Congress, or it could be a 
discretionary choice based on the fact that markets change. It 
forces them to adopt a baseline for the status quo, and then to 
look at various alternatives and evaluate each of those 
alternatives in terms of the costs and benefits, and that will 
then point them in the direction in terms of which is the most 
appropriate way for the Commission to move forward.
    That guidance has been followed by every Chairman, both 
Republican and Democrat, and I was heartened to see in response 
to your question at the nomination hearing last week that Gary 
Gensler, if confirmed, would also continue to follow that 
guidance.
    Senator Shelby. Would you give us just a thumbnail sketch 
of if there is a proposal to come forth with a regulation, a 
mandate by the SEC dealing with the current problems, you know, 
order placement and so forth, what would be the steps to do 
this? How would you go about that if you did?
    Mr. Piwowar. Yeah, thank you for that question. That is one 
of the great things about the regulatory process that we have, 
is it provides for valuable input from the public. So, first of 
all, the SEC would decide whether they want to put a rule 
proposal out; or maybe they are not there yet, maybe they are 
still contemplating whether to put out a formal rule proposal, 
so they could do a request for comment. And then what the SEC 
does is it puts out and provides to the public their own 
economic analysis in terms of what they think the costs and 
benefits are, and then they ask explicit questions of the 
public and ask them questions like: Did we get this right? Do 
you have any other numbers that would support or contradict our 
finding? Or do you have any other numbers that would help us 
make this decision?
    It is a very public process. They go through open meetings. 
The public can participate. It is on their website. Anybody can 
submit comments to this process. And then the procedures and 
the statutes that the SEC has to follow, they have to take into 
account those public comments. Then they go back and 
reformulate their economic analysis with this new information, 
and they can choose to either move forward, not move forward, 
or move in a different direction. So it is a very robust 
process.
    Senator Shelby. One question to Mr. Vollmer. Mr. Vollmer, 
in your opinion, did Robinhood perform in a rational, 
thoughtful way in dealing with their situation when everything 
was a little frenzied?
    Mr. Vollmer. Senator, they certainly reacted in a rational 
way, and they were as thoughtful as time permitted them. But 
they were under a great deal of time pressure with the sudden 
collateral call. And so they reacted quite well, and they did 
impose the trading restrictions, which they did not want to do, 
but they tried to relieve those when they could. But they 
collected collateral that they could put up to DTCC very 
rapidly.
    Senator Shelby. Mr. Chairman, thank you very much.
    Chairman Brown. Senator Tester from Montana is recognized.
    Senator Tester. Well, thank you, Chairman Brown, and I want 
to thank you and Ranking Member Toomey for holding this 
hearing. And I want to thank everybody who has testified. I 
appreciate all of your time, and thanks for being here.
    We have known for a long time that there are perverse 
incentives in our systems and that those systems influence 
where companies make investments, and sometimes more 
importantly whether to make cuts. Many of us here agree that 
there would be benefits to a system where companies focus on 
the long term and helping their communities and their workers 
not just on short-term profits.
    Now, I want to be clear. I do not feel bad for those who 
have lost money trying to game the market. But I am worried 
about those regular folks who saw this and tried to get in on 
something like this and then get hurt.
    The recent market volatility presents an opportunity to 
take a really hard look at our securities regulations and the 
systems that we have in place. Investing in companies in the 
stock market should not be something that can only be gamed by 
the wealthy. I think we all agree with that. So it is my view 
our system should work for everybody that is trying to invest 
in their future.
    So it seems to me that something is not working here for 
companies and communities, and especially the retail investor.
    So this question is for all of you, and I will ask you to 
try to make it short. Some of you have already addressed part 
of this. But if you were able to make any changes and were in 
charge of all of the decisions, whether that is in Congress or 
at the SEC and SROs everywhere, what would you do to approve 
how our system works for retail investors? And you can just go 
in the order that you presented your testimony.
    Ms. Fletcher. Thank you so much, Senator, for that 
question. So the thing that I would want to make our system 
work better for retail investors is better information for our 
investors as to what the true costs are for their trades and 
for the transactions that they are engaging in. Too many 
investors see this zero commission model and think that it 
truly is zero commission, and I think that there is information 
that they would need to truly evaluate the costs and the risks 
of these transactions.
    Senator Tester. Thank you.
    Ms. Robasciotti. Thank you for your question, Senator. If I 
could do one thing, it would be to impose a financial 
transaction tax. I believe that that is a very negligible cost 
to the everyday investor, and it is something that would stop 
the high-frequency traders from dumping gasoline onto the 
already roiling fires of mistakes or other market disruptions 
that come about.
    Senator Tester. OK. Just to be clear, the tax would be put 
on for the purpose of stopping the high-volume folks, correct?
    Ms. Robasciotti. Yes, I believe the tax--the purpose of the 
tax is to add an additional cost, and that additional cost 
would be an invitation for deliberation, which I believe is 
something that investment decisions always benefit from.
    Senator Tester. Thank you. Next?
    Ms. Ghilarducci. Three things. The economic analysis should 
include behavioral economic analysis at the SEC. They should 
look at the way that the phone app looks like and to cut out 
the obvious addictive aspects of the games. Economists should 
be smart about that.
    Second, I agree with Dr. Fletcher that there should be a 
revelation just like we do in professional investing, what the 
true costs are.
    And, third, Nobel Prize economists back up what Robasciotti 
just said, that sand in the works, slowing down the trading 
with a securities tax would help make the market work better.
    Senator Tester. OK. Next?
    Mr. Piwowar. Thank you, Senator Tester, for that question. 
So a few things.
    One, we already talked about, I think, shortening the trade 
settlement cycle would help everyone, allow retail investors to 
get access to their funds quicker, but also take risk out of 
the system.
    Second, amending the accredited investor definition to 
achieve more equitable access to private companies across all 
income levels.
    And, third, just a general one: better disclosures for 
investors. As you know, the SEC is a disclosure regulator, and 
so one of the most important things that the SEC can do is 
provide--is arm investors with information to make informed 
choices. And so one example of that, you know, Professor 
Fletcher had mentioned better information about order routing 
and best execution. I wholeheartedly agree. In my written 
testimony, I attempted to look to see whether Robinhood 
customers in particular, how their order executions were done, 
and, unfortunately, with the publicly available information, I 
could not do that directly. So I think better, more granular 
information about how and why brokers are routing their trades 
and the outcome from that could go a long way to protecting 
investors.
    Senator Tester. Mr. Vollmer.
    Mr. Vollmer. Thank you, Senator. I will be quick. Two 
things.
    First, reduce the cost and complexity of public offerings.
    Second, I am in broad agreement with Mike Piwowar. In 
private transactions, the difference between accredited 
investors and nonaccredited investors should be eliminated, and 
instead in certain private offerings, there should be required 
short-form core disclosures.
    Senator Tester. Thank you all.
    Thank you, Mr. Chairman.
    Chairman Brown. Thank you, Senator Tester.
    The Senator from North Carolina, Senator Tillis, is 
recognized.
    Senator Tillis. Thank you, Mr. Chairman. And thank you all 
for being here. I have been in and out of this Committee. I 
have got two other committee meetings going on at the same 
time, so I am sorry I have not been here for all of your 
testimony.
    I was here after Senator Shelby's and Senator Tester's 
questions, so I want to get right to the financial transaction 
tax. I know that that has been something that has been offered 
up in the wake of the Robinhood/GameStop saga. But there seems 
to be--I am trying to understand how we can avoid what appears 
to have been the consequence for financial transaction taxes 
that have occurred in other jurisdictions and then some 
countries have thought about it and backed off of it based on 
these experiences.
    Reputable studies indicate that the FTT would actually 
reduce the value of a typical investor's 401(k) and maybe as 
much by 8.5 percent in the lifetime of savings. That looks like 
people may have to work an extra 2-1/2 years to make that up, 
to realize the same amount of savings.
    So do you disagree, Professor Ghilarducci, that it would 
have that effect on potential savings?
    Ms. Ghilarducci. Thanks a lot for bringing up that 
research, Senator Tillis. It is really pertinent. That data is 
a bit out of date, and it also is distorted. If 401(k) traders 
or pension funds traded all the time, the tax would reduce 
their savings. Also, that study was done on a tax that was much 
higher than the kinds of taxes that are produced now.
    It is well known in the economic research that if you get 
the tax low enough, you do not hurt long-term investors, but 
that you slow down the high-frequency trading. So it has to be 
done right, but it is backed--the good effect is backed by 
many, many studies, not just that one study you are citing.
    Senator Tillis. Thank you. I know that CBO projects the FTT 
would result in a $43 billion, almost $44 billion first-year 
net loss of tax revenues and would immediately lower the value 
of financial assets. Are you just saying that these studies 
have set the mark too high? And so, in your opinion, what is 
the sweet spot that you think would actually affect the high-
volume investors but not affect the individual investors that 
now a substantial number are in the market?
    Ms. Ghilarducci. I just read a dissertation that had that 
number, that sweet spot--that is a really excellent question--
meaning I will have to get back to you with what that number 
is, but there is a number. And the CBO study looks at the 
short-term effects. People will not be trading and realizing 
those capital gains, but we actually do not want them to. We 
want them to hold those gains longer. So I will get back to you 
with that number.
    Senator Tillis. Thank you.
    Mr. Piwowar, thank you for being here, and I am sorry our 
time is limited. I will not be able to ask questions of all of 
the witnesses. But am I correct that the act of frontrunning 
that some worry market makers could engage in is already 
illegal?
    Mr. Piwowar. That is correct.
    Senator Tillis. So should the discussion be more around 
enforcement of what we already have on the books, or do you 
think we need to go further than that?
    Mr. Piwowar. No, I think you are absolutely right. I think 
it is enforcement of what we already have on the books, right? 
And so if I may just go into a little more detail on that, 
there is an inherent conflict of interest when--in the presence 
of payment order flow, and the SEC explicitly recognizes that, 
and that is why we have best execution requirements, and that 
is why the SEC actively enforces those best execution 
requirements. And also, if I may, if the SEC works a band 
payment for order flow, we would likely go back to commission 
trading. It would cost to trade. And what that does is it does 
not eliminate a conflict of interest; it just changes it.
    So when I was in the private sector, I worked for an 
economic consulting firm, and we provided expert witness 
testimony on behalf of plaintiffs in the FINRA arbitration 
context where brokers were churning the accountable of their 
customers. And so simply, you know, getting rid of payment for 
order flow just moves the conflict of interest, and, again, it 
has to be done through enforcement.
    Senator Tillis. Thank you very much.
    Thank you, Mr. Chairman.
    Chairman Brown. Thank you, Senator Tillis.
    Senator Warner of Virginia is recognized.
    Senator Warner. Well, thank you, Mr. Chairman, and I want 
to pick up where my friend Senator Tillis left off, and I want 
to start with Professor Fletcher, but I would like to hear from 
Michael on this as well.
    On this question around payment for order flow, I think, 
you know, we have now seen evidence that about $6 billion of 
payments to brokers and others within the payment for order 
flow, I remember, gosh, it has probably been 7 or 8 years ago, 
the Royal Bank of Canada had a chart that kind of blew me away 
about the bespoke nature of all this order flow payment. I 
think it is extraordinarily not transparent. I think $6 billion 
generates an awful lot of profits, I think particularly when 
you have got only a few major firms that are on both sides of 
the trade around payment for order flow, and I want Michael to 
comment on this, but it really seems out of whack to me. And 
the argument that says payment for order flow is to increase 
liquidity, it just does not seem to be the case. I mean, if you 
look at the fact that of the 9,000 securities that are traded, 
the top 10 percent, less than 1,000 of them, account for about 
77 percent of all that liquidity, it would say to me that, you 
know, you do not need that payment for order flow to increase 
liquidity because you have already got liquidity.
    And I guess I would start with you, Professor Fletcher. I 
think you have raised these issues as well. You know, we see 
large enterprises with Fidelitys and Vanguards that do not make 
payment for order flow, has that decreased liquidity? Why 
wouldn't we--if we need liquidity payment, why wouldn't we pay 
for, say, the bottom--payment for order flow for the bottom 90 
percent but not the top 10 percent? And have we seen in 
countries like the U.K. and Australia, which have banned 
payment for order flow, any decrease, significant decrease in 
liquidity? Why don't we start with you, Professor Fletcher? I 
have worked with Michael in the past around here. I know he has 
got a different view. But, Professor Fletcher, would you start?
    Ms. Fletcher. So thank you so much for that question, 
Senator. So in terms of the impact of payment for order flow on 
liquidity, I do not think that payment for order flow is needed 
for us to achieve liquidity. We have a deep financial market 
that we have had before payment for order flow, and just as you 
noted, there are jurisdictions, such as United Kingdom and 
Australia, which have banned payment for order flow. And 
research that I read from the United Kingdom recently has not 
indicated that there has been any meaningful decline in their 
liquidity.
    Indeed, what that research has demonstrated is that there 
has been better execution for retail investors at the best 
price in the absence of payment for order flow. So that would 
indicate that there is less conflict and investors are able to 
get better price execution in the absence of payment for order 
flow.
    Senator Warner. And we have not seen--by the way, if you 
are a Fidelity or Vanguard customer where they are not paying 
payment for order flow, are they getting less good execution 
terms than other retail investors?
    Ms. Fletcher. So the problem with that, Senator, is that we 
do not have information to even know that, right? And so one of 
the--this is something that I believe that we have some 
consensus about in this hearing, is that we do not have enough 
information to know whether or not retail investors like 
Fidelity that does not do payment for order flow have a better 
or worse execution than our retail investors with other brokers 
that do have payment for order flow. And so that is a point at 
which we do need more and better information.
    Senator Warner. And I would say that I fear--I have talked 
to our friends at Robinhood, and I have spent some time looking 
at this. I really do fear--and I am all for democratization of 
our market system, but increasingly I fear that oftentimes 
these retail investors are, frankly, not customers. I think 
they are the product, a la many of us being the product for 
Facebook. And I think we are--oftentimes that product is 
manipulative.
    Michael, I want to give you a chance to respond to this. It 
just seems to me that--and I know the excuse is always the way 
you get to no-cost, you know, lack of brokerage fees, but, 
obviously, some of the large enterprises were able to do this 
without that payment for order flow, and I think there are 
inherent conflicts. In that last 10 seconds, do you want to 
give a bit of a rebuttal to my point?
    Mr. Piwowar. Yes, thank you, Senator, for giving me 10 
seconds to respond to that. I would start with agreeing with, 
again, Professor Fletcher, that this is an empirical question, 
right? The concerns that you have raised on the payment for 
order flow side are the same concerns that people have raised 
on the churning side when in the presence of commission-based 
trading. And it is ultimately an empirical question, and, 
unfortunately, right now we just do not have the data for that. 
And so that is why I think it is important for the SEC to 
consider getting better data, getting better transparency in 
this so we can actually evaluate what the proper policy 
alternatives or policy choices are.
    Senator Warner. I know my time is up, but, Mr. Chairman, I 
hope we would look at some of the questions around best 
execution, because I think I actually frankly have seen some 
evidence that there is some manipulation going on there, and it 
would be a subject that would be well worth this Committee 
looking into.
    Thank you, Mr. Chairman.
    Chairman Brown. Thank you, Senator Warner.
    Senator Hagerty from Tennessee is recognized for 5 minutes.
    Senator Hagerty. Chairman Brown, Ranking Member Toomey, 
thank you for holding this hearing today.
    As noted, this hearing is an important part of Congress' 
oversight of our capital markets, and it is also a great 
opportunity to reaffirm support for retail investors' 
participation in United States capital markets and for 
maintaining our markets' fairness, our order efficiency, and 
global competitiveness.
    Before turning to the specific market events that led to 
this hearing and the potential areas for improvement, we must 
not lose sight of the fact that our financial markets are the 
envy of the world, and for a very good reason. They are the 
most robust, most efficient, and they deliver the greatest 
liquidity and funding at the lowest cost of capital. They 
finance our great economic opportunities by connecting retail 
and institutional investors with American individuals and 
families that are looking to achieve the American dream, 
including higher education, homeownership, and financial 
security in their retirement, and with our great businesses 
that need capital to thrive.
    Our vibrant capital markets play a vital role catalyzing 
the economic growth of communities across America. We must not 
forget that, particularly as our economy is recovering from a 
pandemic-induced recession. Now is certainly not the time to 
impose unnecessary constraints on our capital markets and 
market participants that would only slow America's recovery 
from the pandemic.
    Mr. Piwowar, I want thank you for your testimony. Today may 
be the golden age of investing for retail investors. I say 
``may'' only because with the pace of our financial technology 
innovation, who knows what tomorrow will bring? Major 
brokerages now offer zero commission trading, but they must 
continue to follow all legal obligations to serve their 
customers.
    Reams of financial and trading data can be immediately 
accessed at the touch of an app, and while stocks may not 
always go up, our major indices have repeatedly hit record 
highs over the past 4 years, in large part due to solid pro-
growth policies.
    So, Mr. Piwowar, having said that, many investors were 
caught off guard when Robinhood temporarily halted trading of 
certain shares. As a result, a lot more people now know about 
short selling, margin trading, clearinghouse deposit 
requirements, and settlement times.
    Do you agree that the SEC, again, working together with the 
private sector, can accomplish more by focusing on investor 
education rather than engaging in just simply more Government 
paternalism?
    Mr. Piwowar. Thank you, Senator Hagerty, for that question. 
I think in terms of the SEC's authority, I think the SEC 
already has all of the regular authority it needs to address a 
number of the issues that I identify in my testimony.
    In terms of investor education, yes, it is extremely 
important. As I mentioned, the SEC is a disclosure agency, and 
one of the things--you know, as being one of the non-lawyer 
Commissioners at the SEC--that I worried about what that, you 
know, a lot of the disclosures were written by securities 
lawyers and only understandable by securities lawyers. So that 
is why I spent a lot of time with our Office of Investor 
Education and Advocacy to make sure that we are getting the 
word out to investors.
    I also spent a lot of time working with our team that was 
given the authority--or clarified the authority in Dodd-Frank 
that the SEC could engage in investor testing and actually go 
out and do focus groups and surveys to make sure that the 
information that the SEC was giving to investors was 
understandable and digestible.
    And then, finally, I would just add that when I was Acting 
Chairman, one of the major personnel changes I made was to add 
a position specifically focused on military outreach. One of 
the things that had happened during that time was that the 
military was moving from the old pension system to a defined 
contribution program, the TSP program that Professor 
Ghilarducci mentioned. And I had the opportunity to meet with 
some of the sailors on the USS Carl Vinson, and some of these 
sailors were fantastic at, you know, launching and catching 
planes landing on the aircraft carrier, but they did not know 
the first thing about investing for their future. And so we 
embarked on a specific initiative to make that information 
available to them and talk to them about the power of 
diversified, low-cost savings for the long term, the matching 
services and saving for their retirement, and I am happy to say 
that that has been a very successful initiative.
    Senator Hagerty. In the minute we have left, are there any 
specific actions that you would suggest for our retail 
investors today as you look at the evolving markets that we are 
in and the challenges ahead of us? Any specific guidelines that 
you would propose or suggest for our retail investors?
    Mr. Piwowar. Yes. It would be the same advice that I gave 
when I was a professor of finance, which is: Do your homework. 
There is an incredible amount of information that is out there 
for investors that we have never had before, whether it is on 
the Internet or whether it is through educational institutions 
and the like. And if I may talk a little bit about 
gamification, I am not a Robinhood customer. I have never seen 
the app. I do not know what type of gamification is involved 
there. But I do know that using games and simulations is a very 
effective way of educating students. I note that many business 
schools are moving away from the traditional case method and 
lecture method to move toward simulations in trading, and even 
in cybersecurity, training the next generation of folks working 
in cybersecurity, it is all through games.
    So in terms of gamification, I urge caution in throwing the 
baby out with the bath water and that gamification could be 
used for effective education.
    Senator Hagerty. You got it. Thank you very much.
    Chairman Brown. Senator Warren was having technical issues. 
Is she able to join us?
    We will come back to her. Senator Van Hollen of Maryland is 
next.
    Senator Van Hollen. Thank you, Mr. Chairman, Ranking Member 
Toomey. And to all our panelists, thank you for your testimony 
today.
    We know that Wall Street has made an art of high-frequency 
trading and rank speculation that has fattened the wallets of a 
few while putting everyday investors at greater risk, and the 
market events of last January brought attention to Robinhood's 
practice of selling user data to hedge funds that do high-
frequency trading.
    As has been mentioned today, one way to deal with that and 
cut down on high-frequency trading and its risks to market 
stability would be to place a small fee, say 0.1 percent, on 
these Wall Street transactions. It would generate billions of 
dollars that we could invest in greater opportunity for other 
Americans. It would reduce wealth and economic inequality and 
reduce volatility in the market. That is why Senator Brian 
Schatz and I plan to shortly reintroduce our bill to impose a 
financial transaction fee, a high-roller fee, and let me start 
with Ms. Robasciotti. I know you mentioned this. Could you just 
elaborate a little bit more on, first of all, the risks of 
high-frequency trading; and then, second, how a financial 
transaction fee of the kind I am talking about could reduce 
that and be a benefit?
    Ms. Robasciotti. Certainly. Thank you so much for the 
question, Senator. I am happy to hear that you will be 
reintroducing that legislation.
    In terms of the risks, I mostly see them as systemic. When 
we have that classic recipe for market disruptions, what we 
have seen time and time again, whether it is the Great 
Recession or the flash crash, is that high-frequency trading 
simply exacerbates that.
    In terms of how the financial transaction tax actually 
shows up for regular Americans, if you will allow me, I would 
like to use myself as an example. I was born into rural poverty 
in a segregated town. I grew up in an all-Black family. We were 
very poor. I have been homeless multiple times as a child. 
Thankfully, I graduated at 15, went to college. Any of the 
extra money that I have made in my entire working career has 
gone either to my extended family or back into my business. But 
at the age of 42, I have managed to save $100,000 in my 
retirement account.
    I was looking at my average trades, and my average trade 
size is about $9,000 on my own account. If the financial 
transaction tax that you are talking about of 10 basis points 
or 10 percent of 1 percent were to come about, that would cost 
me about $9 per trade, and I have about 20 trades per year. And 
this is very similar to the situation that is true for most of 
my clients; $9 is less than the $9.95 that the discount brokers 
were charging when they were actually charging and trading--
when they were charging the commissions for trades. And so to 
me, that seems very reasonable as a small amount of insurance 
for the price that I pay as a participant in an orderly, fair, 
and efficient market. And one of the ways that I know that that 
is happening is because it is significantly slowing down the 
non-human algorithmic high-frequency trading that has caused so 
much damage.
    Senator Van Hollen. Well, I appreciate that. As you say, it 
really would create a disincentive, a financial disincentive 
for that high-risk conduct that puts other people in the market 
at risk.
    Professor Ghilarducci, you also mentioned this. Could you 
just elaborate a little more? Because this is going to be a big 
debate. I think as we consider different options for revenue, 
this will be an attractive one because, in addition to raising 
revenue, it has these other benefits. Could you just talk a 
little bit more about that?
    Ms. Ghilarducci. Right. I think the economic research has 
been done. It is an idea whose time has come, especially if you 
reintroduce your bill. The costs and benefits have been 
evaluated since James Tobin at Yale in the 1970s proposed it. 
And economist after economist have rerun the numbers, and if it 
is too high, it will have bad effects on long-term savings. If 
it is too low, it will not have any effect. If you get it just 
right--and, actually, 0.1 percent is about right; thank you for 
reminding me of that--what it does is it shifts from high-
frequency trading--it changes behavior--towards more long-term 
holdings, exactly where all of us want people to be with their 
stocks.
    So I think you are on very solid ground in terms of the 
academic research, that the costs are too high of a tax, and 
the benefits of just the right one encourages wealth 
accumulation.
    Senator Van Hollen. Well, thank you. I look forward to 
following up with you and others on the panel as we shape this 
and have the debate. Thank you all very much.
    Thank you, Mr. Chairman.
    Chairman Brown. Thank you, Senator Van Hollen.
    Senator Cramer of North Dakota is recognized for 5 minutes.
    Senator Cramer. Thank you, Mr. Chairman. And thank you to 
our witnesses. Like Senator Tillis and several of us, I 
apologize for coming in and out of the hearing while we cover 
other hearings, but I am grateful, so bear with me if you have 
answered this several times.
    Dr. Ghilarducci, I wanted to get real basic with you if I 
can. In your testimony you stated the following, and I am going 
to read you the quote: ``We need innovations in public policy 
to give more Americans access to what we know works--
professionally managed retirement coverage that allows everyone 
to benefit from the stock markets the same way you and I do in 
[TSP] . . . in a defined benefit plan . . . [TIAA]'' and so on.
    Just so I am really clear, do you believe that all 
Americans should be required to pay for investment advice?
    Ms. Ghilarducci. Investment advice. I think all Americans 
should be in a retirement account--oh, I see, and so if you are 
in a retirement account----
    Senator Cramer. Should they have to pay for it?
    Ms. Ghilarducci. ----you are paying for investment advice. 
You know what? Americans should have access to investment 
advice that is worth it. A lot of investment advice they get is 
from conflicted investors, and that is not good. But if we are 
going to hold our pension fund money in stocks, the advice 
about where to put it should be high value.
    Senator Cramer. And high value being high price, I assume.
    Ms. Ghilarducci. No, well, just that the cost--the benefits 
from the cost, you know, outweigh it.
    Senator Cramer. Sure. All right. In some sense, this whole 
hearing is obviously fundamentally about the level of access 
that retail investors should have to own shares of companies, 
right?
    Ms. Ghilarducci. Yeah.
    Senator Cramer. Some of your positions is that the system 
is rigged, that it is a casino. We have heard all the terms. 
Investors should have to rely upon professional advice for a 
fee to have access.
    Let me ask you, Mr. Vollmer and Mr. Piwowar, do you believe 
retail investors in the marketplace benefit from direct retail 
investor access to the market? And if so, why?
    Mr. Vollmer. Shall I go first, Mike?
    Senator Cramer. Go ahead.
    Mr. Vollmer. I think that retail investors benefit hugely 
from direct access to direct ownership of the equities of 
operating companies, but they should do it with their eyes 
open, as Mike Piwowar said, and accept responsibility for the 
consequences. It is not a casino. The securities markets are 
not a casino. They have risk. There is significant risk to 
them. But as people have pointed out, stock markets in the 
medium and long term produce positive returns. Casinos, if you 
are in the medium or long term, you will lose money.
    So, yes, they ought to have direct access, but they ought 
to be smart about it and recognize their limitations. And, 
clearly, investing in mutual funds or index funds is by far the 
better approach for nearly all retail investors.
    Senator Cramer. Including me, by the way.
    Mr. Piwowar, would you have anything to add to that?
    Mr. Piwowar. Sure, I agree with everything that Mr. Vollmer 
talked about. What I would add to that is it is important for 
investors to have the choice to do both, right? They have 
access to indirect investments through low-cost, professionally 
managed funds, and then investors have the opportunity to 
invest some of their money on their own, do their own homework, 
do their own due diligence on the firms. And over time what 
that does is, whether it is through wins or losses in the stock 
market, they learn. It gets them more engaged in the stock 
market.
    You know, as I mentioned, in business schools we do--back 
when I was teaching, we even started doing some simulations in 
terms of, you know, paper money portfolios. And it is amazing 
how much students get involved in terms of the stock market and 
learning about companies when there is, you know, pretend money 
or real money on the line. So I think it really provides the 
opportunity for people to learn over time about the financial 
system.
    Senator Cramer. I appreciate that. I appreciate all of you, 
really. Every time I participate in one of these, I keep 
thinking, speaking of schools, several of you are professors or 
at least have been or get to be on an adjunct basis every now 
and then. I just think every business school ought to take some 
Senate hearings like this and just play them for students, 
because I think there is a lot to be learned. So I am grateful 
to all of you.
    Thank you, Mr. Chairman. I yield back the rest of my time.
    Chairman Brown. Thanks, Senator Cramer.
    Senator Warren from Massachusetts is recognized for 5 
minutes.
    Senator Warren. Thank you, Mr. Chairman.
    So in recent weeks, I sent letters asking questions of 
those at the center of the GameStop market chaos, and I have 
received responses from the SEC, FINRA, Robinhood, and Citadel, 
the giant hedge fund. I ask that those responses or lack of 
responses, Mr. Chairman, be entered into the record. Without 
objection? Mr. Chairman?
    Chairman Brown. I am trying to unmute. I did not see that 
coming, Senator Warren. Without objection, so ordered.
    Senator Warren. All right.
    Neither side advertised it publicly, but Citadel Securities 
was Robinhood's go-to partner for handling retail trades. At 
the height of the GameStop trading mania, Citadel alone was 
handling more volume than all of Nasdaq. And while Citadel was 
raking in cash from executing GameStop trades with one hand, 
its hedge fund affiliate was bailing out another fund on bad 
GameStop bets with the other hand.
    So I asked questions about Citadel and its relationship 
with Robinhood because this gets at the heart of what is wrong 
with Wall Street. It is riddled with conflicts of interest that 
allow the giants to win every single time.
    Here is some of the information that Citadel would not 
provide: how much money Citadel made from GameStop trades; what 
information on trades Citadel receives from Robinhood about 
GameStop and about millions of other trades; and then how 
Citadel uses that information it gets, whether it passes it 
along to its affiliates, to make even more money.
    Professor Fletcher, is this information important for 
understanding the role that Citadel played during the recent 
GameStop volatility? If, say, Citadel has executed the 
overwhelming majority of GameStop trades during the turmoil or 
had been receiving an information advantage from executing 
Robinhood orders, could that potentially hurt retail investors?
    Ms. Fletcher. Thank you, Senator Warren, for the question. 
Yes, so to just go right to your question, yes, this 
information about Robinhood and other retail brokers' customers 
trading is definitely essential to our understanding of these 
recent market events.
    One of the things that we know is that Citadel does receive 
lots of information about customers' orders from Robinhood, but 
it would also be important to know whether and how that 
information is being used by Citadel and others in order to 
have a clearer understanding of the recent volatility and any 
role that they may play in the swings, in the price swings that 
the stock price experienced.
    Senator Warren. Thank you. You know, Robinhood gets more 
than half of its revenue from collecting fees for pushing its 
customers' orders to outfits like Citadel, and Citadel makes 
its money off the spread. They pocket the small difference 
between the buy and sell price of the trade, and--this is 
important--Robinhood also receives a percentage of the spread 
on each trade.
    So, Professor Fletcher, both the number of transactions 
goes up and the spread tends to widen during periods of market 
turmoil. So am I understanding correctly that when share prices 
for GameStop or any other company undergo extreme swings, 
Citadel and Robinhood both stand to make more money while 
investors pay more to trade?
    Ms. Fletcher. Yes, Senator Warren. This is generally what 
happens in times of stress, and so it is also important to keep 
in mind that market makers like Citadel are both in the 
exchange trading markets and executing huge volumes of orders 
off the exchanges. So while pension funds and other 
institutional investors generally cannot interact with retail 
customers and retail customers are siphoned off and prevented 
from interaction with institutional investors, Citadel sits in 
the middle and is able to interact with all of them. And this 
benefits Citadel by being able to segment the markets in this 
way, which dilutes the number and quality of orders that we see 
on the exchanges. And the profitability is there for Citadel 
for doing so.
    Senator Warren. Right, and this is why the SEC needs to 
investigate the GameStop run-up. The stock market is supposed 
to be about capital formation creating long-term value for 
companies so they can grow and create jobs. This is good for 
the American economy and for American families. But when big 
sharks like Citadel and Robinhood come out ahead no matter what 
happens and when the information they gather is not disclosed 
and when it is secret how that information is used, it is 
easier for these giants to skim off the top at the expense of 
small investors and working families.
    The SEC's job is to provide transparency about these 
companies' market tactics and make sure they do not rip off 
customers. They could start by following up on my questions to 
Citadel and Robinhood.
    Thank you, Mr. Chairman.
    Chairman Brown. Thank you, Senator Warren.
    Senator Cortez Masto from Nevada is recognized for 5 
minutes.
    Senator Cortez Masto. Thank you, Mr. Chairman. Thank you, 
everyone, for being here. This is a great conversation.
    First of all, let me just say I recognize that the SEC is 
undergoing an investigation as well, and I look forward to the 
results of that investigation. And then as the Senator from the 
great State of Nevada, born and raised in Las Vegas, I am 
listening to all of the comparisons with the casinos 
particularly across this country, but knowing one thing, our 
casinos do not allow anybody that is under the age of 21 to 
gamble, and there is a reason. We want to protect our youth.
    So let me ask you this, because I am concerned about the 
gamification of the market and what we are seeing with some of 
these apps. It is clearly looking to target a particular area, 
I think, of our youth who are now more engaged in gaming apps 
than we have ever seen before.
    So let me ask Professor Fletcher, should the design 
features of trading apps because regulated?
    Ms. Fletcher. At a minimum--so thank you very much for that 
question, Senator. I think at a minimum they have to be 
studied, right? Because one of the things, as Professor 
Ghilarducci has noted, is that there are certain behavioral 
economics at play here. And so when we have things like 
confetti raining from the skies for having done a trade, this 
raises concerns about the types of encouragement that we are 
giving traders for just doing trades, which may be problematic 
as we think about trying to encourage appropriate behavior 
within the capital markets.
    Senator Cortez Masto. Thank you. So let me also ask this 
then: Particularly for young adults, do retail broker-dealers 
provide enough education and disclosure to individual consumers 
or should there be more?
    Ms. Fletcher. Currently it does not seem I would be able to 
say--it does not seem as though these broker-dealers provide 
that type of education to retail investors. I know that this is 
a focus of Professor Ghilarducci's research, and so currently I 
do not believe that they provide this level of education for 
retail investors, which then allows them to profit right off 
retail investors engaging in risky behavior that is not wealth-
maximizing for these investors.
    Senator Cortez Masto. So let me ask then, Ms. Robasciotti, 
do you think that anybody under the age of 21 should be allowed 
to engage in the stock market, particularly what we have seen 
with Robinhood, a young man who was only 20 years of age 
committing suicide because he felt he overextended himself?
    Ms. Robasciotti. Thank you very much for the question, and 
it was very sad what happened with that particular young man. I 
do believe that, given that we have all transferred 
responsibility for our retirement from these defined benefit 
plans and pensions down to us all being responsible for 
ourselves, we need to get as early a start as possible. So, 
yes, I would recommend that people under 21 be able to invest, 
yet it is incumbent upon as a society in that transfer of 
responsibility for our long-term financial security, we need to 
also transfer the education. Right now it is just happening 
within families, mostly from father to son and wealthy 
families, and I believe that is a big underpinning reason for 
why there is such concentration of wealth where it is in the 
country.
    Senator Cortez Masto. Do you think that the payment for 
order flow models should be banned?
    Ms. Robasciotti. I do, absolutely. I do, absolutely, and 
specifically because I tell my clients this constantly, that if 
you do not see what you are paying, you are probably paying 
more than you would be comfortable with. And payment for order 
flow is doing exactly that. The customer never sees it, and yet 
they are paying for it in terms of the price that they 
ultimately get.
    One of the reasons that our markets are orderly, fair, 
efficient, one of the ways that they remain so is by ensuring 
that as much information and data is disclosed as possible, and 
that just seems like a huge gap.
    Senator Cortez Masto. Does anybody on this panel believe 
that it should not be banned?
    Mr. Piwowar. If I may, I do not think it should be banned 
without proper study. As I mentioned in my testimony, if you 
ban payment for order flow, you are highly likely to go back to 
commission-based trading, and it just shifts the conflict of 
interest from best execution requirements to churning accounts, 
and then that is the best interest requirement in terms of 
customers. So we have to be careful in these things. It is best 
left for the SEC to study the issue. I agree with Professor 
Fletcher on that. The SEC absolutely should study it in a zero 
commission environment, you know, look at all the costs and 
benefits, and then make a decision based on that.
    Senator Cortez Masto. OK. Thank you.
    And, Mr. Vollmer, you raised your hand, so you believe the 
same thing. Is that correct?
    Mr. Vollmer. I start with Mr. Piwowar and Professor 
Fletcher--we need to look carefully, we need to proceed 
cautiously here. Start from the proposition that every 
participant that provides services in the market deserves some 
reasonable, fair compensation--the broker-dealers, the 
wholesale broker-dealers who also act as internalizers, like 
Citadel Securities, and the exchanges. They all provide 
important services to our capital markets. They all deserve 
compensation.
    Payment for order flow is a method of compensation. If you 
remove it, you need to find another mechanism. That is why Mr. 
Piwowar says you are going to reinstitute commissions on 
trades. So everything is interrelated here. All of these 
relationships are connected. So I think we need to proceed 
cautiously, and I strongly agree with let us look and gather 
evidence and data. But I do not like the payment for order flow 
because it is disruptive and it is not obvious to investors.
    Senator Cortez Masto. Thank you. Thank you all.
    Chairman Brown. Thank you, Senator Cortez Masto.
    Senator Ossoff from Georgia is recognized. His camera is 
not on, and he can proceed with or without it. Senator Ossoff, 
are you there?
    Senator Ossoff. Thank you, Mr. Chairman. I appreciate that. 
On Saturday, with overwhelming bipartisan support, the Senate 
passed the American Rescue Plan, and unlike traditional 
monetary expansion which subsidizes investment banks and unlike 
other recent fiscal measures that have subsidized corporations 
and wealthy donors, zero percent of the stimulus checks and tax 
credits in this bill goes to the top 1 percent. And I would 
like to point out for colleagues on this panel who oppose the 
bill that, following Senate passage, the OECD has revised its 
growth forecast for the U.S. economy, doubling it from 3.2 
percent to over 6 percent this year. And the OECD projects that 
this legislation will boost global growth by a full percentage 
point this year.
    Ms. Robasciotti, the title of this hearing is ``Who Wins on 
Wall Street?'' We just passed an ambitious fiscal measure in 
the Senate. Given that the bottom 50 percent of American 
households by wealth possess just 1 percent of total national 
wealth held in the stock market, what, in your view, are the 
benefits of economic policy that gets cash directly to low-
wealth households by fiscal measures versus economic policy 
that adds liquidity to financial markets via the banking sector 
like traditional monetary policy?
    Ms. Robasciotti. Thank you very much for the question, 
Senator Ossoff. The way that it actually occurs, when you give 
money to people who come from the kind of background that I 
have, they are more likely to spend it. We learned about this, 
you know, in economics textbooks as the marginal propensity to 
consume. But it is just true that if you give money to those 
who are more in need, they are going to be more likely to spend 
it and circulate it throughout the economy, and so it does not 
just help them. It is not just something that we want to do to 
help the vulnerable. It is actually something that creates a 
multiplier effect throughout the entire economy. So I believe 
it just makes good economic sense.
    Senator Ossoff. Thank you. And what, in your view, are the 
costs, Ms. Robasciotti, of economic stimulus like traditional 
monetary expansion, which adds liquidity to financial markets 
by allowing investment banks to access credit at 
extraordinarily low rates or just transfers cash to financial 
institutions' balance sheets by processes like quantitative 
easing?
    Ms. Robasciotti. Again, thank you for the question. Those 
who are doing well at this point with their outsize gains, 
particularly during the pandemic, do not need any more help. 
What it actually does is just sequesters that money in the 
hands of those who are most wealthy and are not going to put it 
back necessarily into the economy. You know, we had that 
argument of trickle-down economics, and we can kind of see from 
where we all are that that is not actually what happened. And 
so it actually harms all of us to make sure that those types of 
economic stimulus are going to the wealthiest in the country 
rather than going where it is going to actually do us all some 
good.
    Senator Ossoff. Thank you, Ms. Robasciotti. Professor 
Fletcher, you opened your testimony by rightly noting, ``A core 
purpose of the financial markets is to facilitate the efficient 
allocation of capital.'' I am curious for your perspective on 
this. Over the last 15 years, U.S. investment banks have 
required multi-trillion-dollar bailouts to avoid insolvency, 
and even after the acute credit crisis in 2007-08, central 
banks and the Federal Reserve have continued to grant 
investment banks access to credit at record low rates and 
engaged in sustained quantitative easing, adding trillions of 
dollars to financial markets. Do you believe, Professor 
Fletcher, that the U.S. financial system in its current 
configuration facilitates the efficient allocation of capital?
    Ms. Fletcher. Thank you so much for that question, Senator. 
I think that the U.S. capital markets are among some of the 
best capital markets in the world, but there are significant 
issues with the market structure that we have currently in that 
we have retail investors that are better able to make risky 
decisions without fully appreciating the cost of those 
decisions. Within our capital structure, we also have 
questionable valuations for some companies that may not be 
fully reflective of an efficient market. So do I believe that 
our markets are fully efficient, no, not quite; but do I 
believe that they are among the most efficient in the world, 
absolutely.
    Senator Ossoff. Thank you, Professor. Thank you, Mr. 
Chairman. I yield back.
    Chairman Brown. Thank you, Senator Ossoff.
    Thank you to the witnesses for being here today, for your 
really incisive testimony. Thank you for that.
    I will just make a brief announcement. For Senators who 
wish to submit questions for the record, these questions are 
due 1 week from today, Tuesday, March 16th. For witnesses, you 
have 45 days, if you would, to respond to any of those 
questions from me or from my colleagues. Thank you again for 
that.
    A couple of comments. I appreciated Professor Ghilarducci 
making it clear that the stock market is not the economy. 
Making the markets fair is important, but equally important is 
remembering that half the country does not have any stocks at 
all. Most Americans get their money from a paycheck. Growing 
those paychecks, not growing stock prices, is the most 
important thing we can actually do to improve American 
families' lives. And when people's hard work pays off, the more 
they are able to put a little aside at the end of the month and 
invest for the future. We are never going to have fair markets 
or an economy that reaches its full potential until our economy 
and its rules reflect the dignity of work.
    With that, the hearing is adjourned. Thank you all so much.
    [Whereupon, at 11:55 a.m., the hearing was adjourned.]
    [Prepared statements, responses to written questions, and 
additional material supplied for the record follow:]
              PREPARED STATEMENT OF CHAIRMAN SHERROD BROWN
    Last February, as the world came to the collective realization that 
we were confronting a global pandemic, the U.S. stock market suffered 
its fastest drop in history, plummeting 34 percent in 33 days.
    That was followed by the fastest stock market rebound in history, 
recovering all of those losses by mid-August.
    It was clear what most working people had suspected for a long 
time: that the stock market is detached from the economy and the 
reality of most Americans' lives.
    The coronavirus was spreading, widespread testing wasn't available, 
and we didn't know if the hope of a vaccine was months or years away.
    Unemployment soared, reaching 23 million jobs lost by April. Almost 
one year later, only about half of those jobs have been recovered. 
Families and small businesses had no certainty about what their lives 
would look like in a few weeks, let alone next year.
    But the stock market continued to go up and up, and those lucky 
enough to own investments reaped the profit.
    To some, this looked like a new development. But to millions of 
workers who have watched the stock market reach new heights while their 
own paychecks never kept up, it looked pretty familiar.
    Families haven't been too surprised by this state of affairs--a 
whole lot of them never recovered from a foreclosure or losing their 
savings during the last crisis, but watched Wall Street pocket its 
bailout and go on to record highs a few short years later..
    That's because when you look at who truly benefits, it's clear that 
the stock market's gains funnel wealth to a tiny sliver of people, 
often at the direct expense of American workers. We discussed this last 
week in our hearing Wall Street vs. Workers.
    According to Federal Reserve data, the wealthiest one percent hold 
53 percent of stock and mutual fund investments, and the bottom 90 
percent own less than 12 percent.
    Between workplace retirement accounts and personal investments, 
about half of American households have at least one financial account 
tied to the market, but only one in six directly own stocks.
    And none of this reflects the actual makeup of the country. Only 31 
percent of Black families and 28 percent of Hispanic families own any 
stock investment.
    The wealthy are far more likely to have these accounts than middle-
class families, who in turn are far more likely to be in the market 
than working-class or poor families.
    So when the stock market soars, most people barely notice. They're 
just trying to keep up with the cost of living within their paychecks.
    In recent years, the growth of fintech in financial services has 
given rise to trading platforms that offer free stock trades. Firms 
like Robinhood and others claimed to ``democratize'' stock trading with 
flashy marketing and easy-to-use features.
    And in one sense, it worked--they attracted millions of customers, 
many of them young and new to investing.
    The frenzied stock trading this January, when shares of GameStop 
Corporation went from $18 to over $400 in a matter of weeks, showed how 
millions of retail investors could engage with each other and create a 
sensation.
    But it also lays bare serious risks.
    There are real people who got caught up in the frenzy who suffered 
real consequences. If the people who are busy working, watching their 
kids, or living their lives can't make sense of the stock market's 
booms and busts, they'll continue to lose faith in the market. And 
hedge funds and insiders will continue to reap the vast majority of the 
profit.
    That's bad for everyone in the long run.
    Robinhood tried to blame its decision to cut off its customers from 
being able to purchase GameStop and other stocks on industry-wide 
standards for processing stock purchases. Of course, the SEC and others 
should examine and consider how to reduce risk in the financial system 
by cutting the time it takes to complete stock purchases. Everyone 
would benefit.
    But it's become clear that firms like Robinhood were founded on a 
model that exploits small investors by encouraging fast and loose 
trading, and then sells their trades to big market players.
    In a few short years, Robinhood violated the law, failed to respond 
to customers when they needed help, and when it got in trouble, cut off 
customers to save itself. Robinhood attracted new customers to 
investing, encouraged them to trade, profited off of them, and then 
broke their trust--precisely when they needed the company to have their 
backs.
    It is also obvious that the David versus Goliath story we first 
heard in January was not the whole picture. Well-funded, sophisticated 
hedge funds made big profits alongside the people trading at home, and 
we know they always had better access and information than any of us 
ever will. No one thinks that's fair.
    Some have tried to blame the small-time investors. They scold 
people just trying to make some extra money in the worst job market 
we've seen in most of our lifetimes.
    Because of the Robinhood business model, we've all learned the new 
term ``gamification''.
    But let's be clear: We've seen Wall Street treat the markets as a 
game for decades--a game they always win, at the expense of pretty much 
everyone else.
    Wall Street has never been friendly to the little guy. Surely this 
time is no different.
    Yes, some regular people have had success. But fundamentally, the 
system is set up to funnel more wealth to the already-wealthy. Just 
like in Las Vegas, the House always wins.
    The economy and the markets should work for everyone, not just the 
well-connected. And they should reflect the economy we all want--with 
broadly shared prosperity, and a growing middle class that all workers 
can join.
    When that happens, people will have confidence the markets will 
actually work for them, not just Wall Street. And we'll see more 
Americans save and invest for the future.
    This hearing will examine not only the volatile activity in a dozen 
stocks early this year, but also the practices that encouraged that 
activity. We will see how it affects our economy in the long term, and 
who benefits and who loses from this ``tech induced'' stock market 
volatility.
    I look forward to our witnesses' testimony.
                                 ______
                                 
              PREPARED STATEMENT OF GINA-GAIL S. FLETCHER
            Professor Of Law, Duke University School of Law
                             March 9, 2021
    Chairman Brown, Ranking Member Toomey, Members of the Committee: 
Thank you for inviting me to testify at this hearing. I am a Professor 
of Law at Duke University, where my research focuses on financial 
regulation, market manipulation, and corporate law. Before becoming an 
academic, I practiced law at Gibson, Dunn, & Crutcher LLP, in the areas 
of securities regulation, banking, and mergers and acquisitions.
Introduction
    A core purpose of the financial markets is to facilitate the 
efficient allocation of capital. \1\ When functioning efficiently, the 
markets allow for capital to be put to its most profitable use, which 
enables firms to access capital and improves the allocation of finite 
resources within the markets and the economy. When the fundamental 
operation of the markets is undermined, there are far-reaching effects 
that extend beyond the capital markets, affecting consumer savings, 
investments, retirement plans, and the rest of the real economy. \2\
---------------------------------------------------------------------------
     \1\ Gina-Gail S. Fletcher, ``Legitimate Yet Manipulative: The 
Conundrum of Open-Market Manipulation'', 68 Duke L.J. 479, 489 (2018).
     \2\ Id.; see Benjamin P. Edwards, ``Conflicts & Capital 
Allocation'', 78 Ohio St. L.J. 181, 184-85 (2017).
---------------------------------------------------------------------------
    The recent market volatility stemming from trading in ``meme 
stocks'', most notably GameStop, \3\ has raised concerns as to the 
integrity, stability, and overall health of the markets. Over the 
course of a few weeks in early 2021, GameStop--a struggling retailer of 
video games--saw its share price increase 1,500 percent, crash, and 
then spike again. \4\ In the wake of the volatility of GameStop's stock 
price, many investors (both large and small) have been left with 
significant losses \5\ and some market participants and members of the 
public wonder whether the GameStop volatility is the ``new normal'' for 
the markets.
---------------------------------------------------------------------------
     \3\ John Hyatt, ``How GameStop (GME) Is Creating Volatility--and 
Opportunities--for Investors'', NASDAQ (Jan. 29, 2021, 1:54 PM), 
https://www.nasdaq.com/articles/how-gamestop-gme-is-creating-
volatility-and-opportunities-for-investors-2021-01-29.
     \4\ Reuters Staff, ``Timeline: The GameStop Battle--How It 
Unfolded for the Key Players Testifying'', Reuters (Feb. 18, 2021, 1:20 
AM), https://www.reuters.com/article/us-retail-trading-gamestop-
timeline/timeline-the-gamestop-battle-how-it-unfolded-for-the-key-
players-testifying-idUSKBN2AI0IQ.
     \5\ Harry Robertson, ``Short-Sellers Are Nursing Estimated Losses 
of $19 Billion in 2021 After Betting on GameStop's Stock To Plunge'', 
Markets Insider (Jan. 30, 2021, 2:31 PM); Drew Harwell, ``As GameStop 
Stock Crumbles, Newbie Traders Reckon With Heavy Losses'', Washington 
Post (Feb. 2, 2021, 5:34 PM), https://www.washingtonpost.com/
technology/2021/02/02/gamestop-stock-plunge-losers.
---------------------------------------------------------------------------
    The recent market events have raised questions as to the long-term 
health of the markets, specifically the effects of such extreme 
volatility and the conduct that drove it on public perception of the 
markets. Additionally, these market developments have brought to the 
fore some issues related to how the markets function and are regulated, 
such as efforts to promote market integrity and prevent market 
manipulation; the costs and impacts of conflicted brokers' routing 
practices, including payment for order flow (PFOF); and the impact of 
larger numbers of small-dollar, higher risk trading in the markets. \6\
---------------------------------------------------------------------------
     \6\ See, e.g., William Watts, ``GameStop Saga Illustrates Rising 
`Noise-Trader Risk' That Could Feed Market Volatility, Warns 
Quantitative Analyst'', Marketwatch, (Feb. 26, 2021, 1:55 PM), https://
www.marketwatch.com/story/gamestop-saga-illustrates-rising-noise-
trader-risk-that-could-feed-market-volatility-warns-quantitative-
analyst-11614365724.
---------------------------------------------------------------------------
I. Market Integrity and Stability
A. Market Integrity: The Importance of Public Perception
    Market integrity is key to the functioning of healthy capital 
markets. \7\ Market integrity is a broad term that refers to notions of 
market fairness, investor protection, and the absence of misinformation 
and market abuse. To the extent the public believes the markets are 
fair, investors are likely to participate in the markets. Conversely, 
if the markets are viewed as unfair, investors may refrain from 
participating in the markets altogether or, should they participate, 
discount all transactions to reflect the risk of dealing in an unfair 
market. \8\ Public perception of the fairness (or unfairness) of the 
market, underlies market integrity and, in turn, is crucial to the 
efficient allocation of capital.
---------------------------------------------------------------------------
     \7\ Fletcher, supra note 1, at 493.
     \8\ Id. at 492-93.
---------------------------------------------------------------------------
    The GameStop incident has highlighted public perception of the 
unfairness of the markets, on the one hand, and raised new concerns 
about the integrity of stock prices. As trading in GameStop gained 
momentum, a narrative of David vs. Goliath coalesced, with the 
individual, Reddit-led investors being cast as David against the short 
selling, hedge fund Goliaths. \9\ Many of these individual investors 
expressed the viewpoint that the markets were ``rigged against the 
little guy'' and saw their GameStop trades as a way to right the wrongs 
of the past.
---------------------------------------------------------------------------
     \9\ See, e.g., Associated Press, ``GameStop Soars as Swarming 
Small Investors Face Down Hedge Funds'', L.A. Times (Jan. 25, 2021, 
1:39 PM), https://www.latimes.com/world-nation/story/2021-01-25/
smaller-investors-face-down-hedge-funds-as-gamestop-soars; Edward 
Helmore, ``How GameStop Found Itself at the Center of a Groundbreaking 
Battle Between Wall Street and Small Investors'', Guardian (Jan. 27, 
2021, 5:00), https://www.theguardian.com/business/2021/jan/27/gamestop-
stock-market-retail-wall-street; ``All Things Considered: Reddit Users 
Vs. Wall Street Giant in Fight Over GameStop Stock Value'', NPR (Jan. 
27, 2021, 4:14 PM), https://www.npr.org/2021/01/27/961279048/reddit-
users-vs-wall-street-giant-in-fight-over-gamestop-stock-value.
---------------------------------------------------------------------------
    While the realities of who was trading in which directions, how 
much, and when will take time to decipher, the views echoed in the 
GameStop incident are reflective of a larger narrative about the 
integrity and fairness of the markets. In recent years, an increasing 
view is that the markets are regulated for the benefit of Wall Street 
and to the detriment of Main Street. \10\ During the 2008 crisis, for 
example, banks received bailouts while ordinary citizens lost their 
jobs and homes, struggling to recover years later. Likewise, with the 
COVID-19 pandemic millions of Americans lost their jobs and their 
health, but public corporations earned unprecedented profits and the 
stock market continued to soar. The disparate impact of these two 
significant financial crises on ordinary citizens versus the economic 
elite, especially when coupled with the (seeming) lack of enforcement 
against corporate wrongdoing, have fomented the strong perception that 
the markets are titled in favor of the wealthy, the banks, and the 
hedge funds.
---------------------------------------------------------------------------
     \10\ See, e.g., Alexis Goldstein, ``Opinion, The Trouble With 
GameStop Is That the House Still Wins'', N.Y. Times (Feb. 1, 2021), 
https://www.nytimes.com/2021/02/01/opinion/gamestop-biden-wall-street-
reddit.html; Zachary Karabell, ``How the GameStop Trading Surge Will 
Transform Wall Street'', Time (Jan. 28, 2021, 8:44 PM), https://
time.com/5934285/gamestop-trading-wall-street.
---------------------------------------------------------------------------
    The proliferation of these views indicates that many investors do 
not view the markets as honest, fair, or accessible. Increasingly, 
seemingly freed by this recognition of the apparent ``unfairness,'' 
many investors appear to be engaging in transactions that undermine 
capital allocation and distort asset prices to (attempt to) tilt the 
markets in their favor.
    Yet, even for those who did not previously believe the markets are 
inherently rigged to favor insiders, the extreme volatility associated 
with meme stocks may nonetheless cause them to be concerned with the 
integrity and stability of the markets. This is particularly true if 
regulators and lawmakers fail to act-either by not addressing the 
underlying cause for the volatility or by not holding someone 
accountable for wrongdoing.
    To safeguard the integrity of the markets, therefore, it is 
important that lawmakers and regulators undertake efforts to repair the 
market's reputation and bolster investor confidence. Research has shown 
that when investors question the integrity of the markets, they 
withdraw from the markets, reducing the amount of capital available in 
the market in general. \11\
---------------------------------------------------------------------------
     \11\ Emilios Avgouleas, ``The Mechanics and Regulation of Market 
Abuse'' A Legal And Economic Analysis 212 (2005).
---------------------------------------------------------------------------
    Thus, failure to address the issues that GameStop trading 
highlights may, ultimately, weaken the markets.
    While addressing these issues is neither simple nor 
straightforward, this ought not dissuade Congress and the SEC from 
investigating how to minimize the likelihood and impact of a future 
iteration of the volatility we witnessed earlier this year.
B. Market Manipulation: Was GameStop Stock Manipulated?
    A common theme accompanying discussions about GameStop's stock 
price was market manipulation. Many questioned whether the coordinated 
trading of Reddit-inspired investors constituted market manipulation 
from a legal standpoint and what if anything the SEC should or could do 
in response.
    Among the initial motivators behind the adoption of the securities 
laws was the prevention of market manipulation. Although the purpose of 
financial market regulations and laws has since been extended, 
proscribing and punishing market manipulation remains one of primary 
goals of the SEC. Market manipulation imposes significant social and 
financial costs on the financial markets. Furthermore, it undermines 
the efficient allocation of capital by distorting prices and by 
contributing to the perception that the markets lack integrity.
    Despite its centrality to securities laws, market manipulation is 
undefined in the securities laws. \12\ Instead, the laws and associated 
regulations prohibit specific, named conduct such as price 
artificiality, fictitious trades, and fraud. Some have commented that 
the absence of a statutory definition is the reason that this area of 
the law is confusing and contradictory. But, as others have noted, 
given the unexpected ways in which the markets may develop, tying 
regulators to a fixed definition of manipulation may do more harm than 
good. \13\
---------------------------------------------------------------------------
     \12\ Fletcher, supra note 1.
     \13\ As one court opined: ``Congress' decision to prohibit 
manipulation without defining it apparently arose from the concern that 
clever manipulators would be able to evade any legislated list of 
proscribed actions or elements of such a claim.'' In re ``Soybean 
Futures Litig.'', 892 F. Supp. 1025, 1044 (N.D. Ill. 2015).
---------------------------------------------------------------------------
    In identifying manipulative conduct, courts have typically looked 
for evidence of willful misconduct, fraud, and/or an artificial price. 
Academics have also tried to define manipulation through conduct that 
has an improper effect on price or efforts to dominate supply and 
demand to artificially distort prices.
    Notwithstanding the lack of an agreed upon definition, the SEC, 
FINRA, and the exchanges all have anti-manipulation provisions that 
proscribe and punish abusive practices that distort asset prices. But 
as decades of enforcement actions and litigation has demonstrated, 
proving market manipulation as a matter of law can be very difficult. 
Indeed, one person's manipulation can be seen as another person's 
exuberance, even if irrational.
    Whether the GameStop incident rises to the level of legally 
recognized and punishable market manipulation is a fact-intensive 
inquiry, which is ongoing. But, beyond the stark question of whether 
this constitutes illegal manipulation, the GameStop incident highlights 
the ways in which social media and technology have combined to push the 
limits of market regulations. It also calls into question to what 
extent existing understandings of manipulation can adequately respond 
to and, ultimately, deter the type of misconduct that may have 
occurred. Regardless of the outcome of the pending investigations into 
possible market manipulation, there are two recommended actions 
Congress and the SEC should consider.
    First, Congress and regulators should hold traders accountable for 
their words and actions, even in the absence of explicit fraud. Price 
distortion can occur without explicit fraud and, when it does, someone 
ought to be held accountable. \14\ There ought to be consequences for 
using internet platforms and social media to encourage others to buy/
sell stock, if result is a price that is so distorted as to be 
completely divorced from the company's fundamentals.
---------------------------------------------------------------------------
     \14\ Fletcher, supra note 1.
---------------------------------------------------------------------------
    Unfortunately, manipulation laws have become ossified, and courts 
have been somewhat hostile to new interpretations and applications of 
the law from regulators. This makes it somewhat challenging for 
regulators to address novel forms of market manipulation using laws 
that were written almost a century ago and long before most of the 
things that are commonplace in today's markets were even conceivable. 
The type of coordinated action among thousands of dispersed, small-
dollar investors that was seen during GameStop's rise was not 
imaginable when courts and regulators first conceptualized the market 
power needed to squeeze or corner the markets. However, in today's 
markets this is not only plausible, but it can be just as disastrous as 
traditional manipulation schemes.
    As the markets evolve and the types of abusive trading tactics 
evolve along with it, it becomes increasingly urgent that Congress 
revisit and expand the antimanipulation authority granted to the SEC. 
Congress and regulators should explore updating the laws and rules 
against market manipulation to ensure regulators have the tools they 
need to protect the integrity of the markets against intentional, 
extreme price distortions.
    Second, the SEC has traditionally relied on enforcement actions to 
address market manipulation. Punishing traders ex post for their 
conduct has been an understandable approach in the past, but it is not 
as sound in the modern markets where herd behavior is swift and can be 
disastrous. In today's markets, the SEC should explore the types of ex 
ante guardrails needed to protect the markets from extreme price 
distortion that will undoubtedly leave destruction in its wake.
    As the volatility in GameStop and other stock persisted, the SEC 
issued a statement that it was monitoring the situation, but failed to 
take any action. The agency's refusal to act lead many to wonder why 
trading in GameStop stock was not halted once it became clear that the 
stock price was completely and unjustifiably divorced from the 
company's fundamentals. Arguably, the SEC's failure to act created a 
vacuum of authority, which resulted in a haphazard and uneven response 
from market actors. While some brokers halted trading in GameStop, 
others did not, causing public uproar. Leadership from the SEC 
indicating what should have been done or, at a minimum, a statement of 
recommended action would have had a better outcome for the markets and 
less public furor.
    It is not beyond the scope of the SEC's authority to proactively 
consider how it will respond to certain indicators of price distortion 
and manipulation in the markets. In light of the far-reaching 
consequences of manipulation on today's interconnected markets, it is 
imperative that the SEC consider how to address extreme volatility in 
real time, particularly when such volatility may be borne from 
manipulative and abusive trades.
II. Democratizing the Capital Markets
A. The Impact of Technology and Innovation on Retail Investors' Access 
        to the Public Capital Markets
    The Federal securities laws were adopted to ensure that all 
investors--not just sophisticated, wealthy, or connected insiders--have 
access to essential information about companies and basic shareholder 
rights. In many ways, the Federal securities laws exist to 
``democratize'' the capital markets.
    In recent years, financial innovation has further expanded the 
availability of capital for firms and enhanced retail investors' access 
to the markets. \15\ The creation and proliferation of discount 
brokers, mutual funds, exchange traded funds, and 401(k) plans have 
made investing available to a large segment of the population. Further, 
the entrance of robo-advisors onto the financial scene has granted 
investors access to model portfolios tailored to their risk profiles 
and investment preferences, further increasing access for consumers 
seeking low-cost financial advice. \16\
---------------------------------------------------------------------------
     \15\ John V. Duca, Fed. Reserve Bank of Dallas, ``The 
Democratization of America's Capital Markets'' 10-13 (2001).
     \16\ Anne Tergesen, ``Robo Advisers Seen Exploding in 
Popularity'', Wall St. J. (Dec. 11, 2015, 7:08 PM), https://
www.wsj.com/articles/robo-advisers-seen-exploding-in-popularity-
1449860367.
---------------------------------------------------------------------------
    The democratization of the financial markets, therefore, has been 
ongoing for decades, but it has undoubtedly exploded in measure and 
kind in the past 5 years. \17\ Efforts to increase retail access to the 
markets have resulted in greater participation in index funds, mutual 
funds, etc., which rely on intermediaries to transact on consumers' 
behalf. \18\ Recently, with the rise of zero-commission trading, retail 
investors are choosing to directly participate in the markets at 
unprecedented levels.
---------------------------------------------------------------------------
     \17\ See Charlotte Gifford, ``Democratising Finance'', World Fin. 
(Jan. 25, 2021), https://www.worldfinance.com/special-reports/take-
from-the-rich-give-to-the-poor.
     \18\ Jay Clayton, Chairman, SEC, Speech at Temple University: 
``The Evolving Market for Retail Investment Services and Forward-
Looking Regulation--Adding Clarity and Investor Protection While 
Ensuring Access and Choice'' (May 2, 2018), https://www.sec.gov/news/
speech/speech-clayton-2018-05-02.
---------------------------------------------------------------------------
    In the past year or two, many low-cost brokers have eliminated 
explicit fees to buy and sell stocks, thereby opening up access to the 
markets to those who may have been unwilling or unable to trade because 
of what were once significant explicit commissions and fees. \19\ 
Additionally, the ability to trade in fractional shares has lowered 
costs for investors who no longer need over $2,000 to buy a single 
share of a company like Amazon, for example; instead, they can purchase 
$100 of stock or 1/20th of the share. With technology, market 
democratization has gone a step further--brokers allow trading through 
apps, thereby making it easier for younger investors to access the 
markets on their mobile devices. \20\ Today, it is not a stretch to say 
that the markets are truly within reach of anyone.
---------------------------------------------------------------------------
     \19\ For example, Schwab eliminated fees for stock purchases in 
October 2019. See Alexander Osipovich and Lisa Beilfuss, ``Schwab Cuts 
Fees on Online Stock Trades to Zero, Rattling Rivals'', Wall St. J. 
(Oct. 1, 2019, 7:04 PM).
     \20\ Alicia Adamczyk, ``Trading Apps Like Robinhood Are Having a 
Moment. But Users Should Be Careful'', CNBC (Aug. 24, 2020, 3:49 PM), 
https://www.cnbc.com/2020/08/21/robinhood-is-having-a-moment-users-
should-be-careful.html.
---------------------------------------------------------------------------
    These developments have had a noteworthy and positive impact on 
retail participation in the markets. A recent study has demonstrated 
that the racial gap in individual stock ownership has been halved in 
less five years. \21\ Similarly, a recent FINRA study found that the 
majority of investors who opened their first account in 2020 were under 
the age of 45, had lower incomes, and were more likely to be racially 
and ethnically diverse. \22\
---------------------------------------------------------------------------
     \21\ Aaron Brown, ``Opinion, Stock Investors Are Younger and More 
Racially Diverse'', Bloomberg (Sept. 21, 2020, 6:00 AM), https://
www.bloomberg.com/opinion/articles/2020-09-21/stock-investors-are-
younger-and-more-racially-diverse.
     \22\ News Release, Angelita Williams and Eric Young, ``FINRA, New 
Research: Global Pandemic Brings Surge of New and Experienced Retail 
Investors Into the Stock Market'' (Feb. 2, 2021), https://
www.finra.org/media-center/newsreleases/2021/new-research-global-
pandemic-brings-surge-new-and-experienced-retail.
---------------------------------------------------------------------------
    In sum, technology and innovation have enabled a ``shift towards 
more equitable investment participation,'' which is a laudable 
achievement in the development of the markets. \23\
---------------------------------------------------------------------------
     \23\ Id.
---------------------------------------------------------------------------
    However, the rules for stock trading have generally not kept pace 
with these rapid evolutions. Technology has made it easy to trade 
incredibly complex, leveraged, and high-risk investments, with relative 
ease. I urge Congress and the SEC to think clearly about what that 
means not just for those investors, but for the millions who invest 
through pension funds and mutual funds, as well as the businesses and 
economy that rely on our capital markets.
    If you wish to further democratize the capital markets, I would 
urge you to begin by restoring the emphasis on the public markets, and 
looking to reverse the proliferation of exemptions and exceptions from 
the Federal securities laws.
B. The Private Capital Markets Are Not Suitable for Retail Investors
    Because of the great strides retail investors have made in 
accessing the public capital markets, there may be an inclination to 
consider granting them access to the private capital markets. The 
recent market events have exposed the growing discontent of retail 
investors with the perceived unfairness of the public markets. As the 
argument goes, institutional investors and high-net-worth investors 
have access to a market that is brimming with greater returns on 
investment that the public markets and it is to the disadvantage and 
detriment of the retail investor to deny her access to these markets. 
This argument, however, ignores key factors that would put retail 
investors in a significantly worse position if they were able to invest 
directly in private securities.
    The public capital markets in the U.S. are based on a system of 
regulation that is based fundamentally on mandatory and ongoing 
disclosure from those offering securities to investors and the public. 
Broadly, securities must be registered with the SEC prior to being 
offered and sold on the public markets. \24\ There must be ``full 
disclosure of the character of such securities,'' \25\ including basic 
information about the company, its management, and its financials. 
Further, after a company is ``public,'' it must share information with 
the public fairly, and cannot selectively disclose information to 
favored investors or other insiders.
---------------------------------------------------------------------------
     \24\ Securities Act of 1933 5, 15 U.S.C. 77e (2018).
     \25\ H. Rep. 73-85 (1933), at 2-3.
---------------------------------------------------------------------------
    The mandatory disclosure regulatory regime of the U.S. public 
markets is foundational to market democratization because it ensures 
that all investors--regardless of size, influence, insider connections, 
or wealth-have access to the same information on an ongoing basis. 
Mandatory disclosure obligations for accessing the capital markets 
levels the playing field as between retail investors with no access and 
corporate insiders or sophistication, influential investors.
    To grant retail investors access to the private capital markets 
would place retail investors at a significant informational and 
positional disadvantage because there would be considerable information 
asymmetry. As a starting principle, it is important to keep in mind 
that ``private'' markets refer to markets for which the mandatory 
comprehensive disclosure and rights regime of the Federal securities 
laws do not apply. \26\
---------------------------------------------------------------------------
     \26\ See, e.g., Press Release, SEC, ``SEC Charges AT&T and Three 
Executives with Selectively Providing Information to Wall Street 
Analysts'' (Mar. 5, 2021), https://www.sec.gov/news/press-release/2021-
43#.YEOQlWUhHjk.twitter.
---------------------------------------------------------------------------
    In contrast to the public markets where information is readily 
available, the private markets are opaque and subject to little to no 
disclosure requirements. \27\ This lack of disclosure means that 
investors in the private markets must ascertain the value of securities 
on their own and without the help of the public disclosures or readily 
available information. Indeed, private securities typically have no 
generally agreed upon ``market price'' as the company's valuation is 
often determined separately with each new round of financing. Trading 
prices in private market trading venues often have massive variations, 
and comparatively high transaction costs. \28\
---------------------------------------------------------------------------
     \27\ Elizabeth Pollman, ``Information Issues on Wall Street 2.0'', 
161 U. PA. L. Rev. 179, 235-36 (2012).
     \28\ Letter from Tyler Gellasch, ``Health Markets Ass'n. to Off. 
Sec'y'', SEC, (Sept. 30, 2019), https://healthymarkets.wpengine.com/wp-
content/uploads/2019/09/SEC-Concept-Release-9-30-19-1.pdf.
---------------------------------------------------------------------------
    Unsurprisingly, private company valuation is notoriously fraught 
with complications and disagreement, resulting in valuations that may 
be unsupported based on the company's undisclosed financial condition. 
The case of WeWork provides a salient example. In January 2019, the 
company was valued on the private markets at $47 billion. It's largest 
shareholder SoftBank is an investment bank with significant experience 
investing in private companies. Yet, shortly after WeWork filed its S-1 
to initiate a public offering of its stock, the company's valuation 
plummeted. Several months later, after a shelved IPO, WeWork was valued 
at a little under $3 billion. \29\ But again, this valuation was based 
on SoftBank's calculations, which are debatable given that WeWork is 
still private and not subject to public disclosure of its financial 
condition.
---------------------------------------------------------------------------
     \29\ Bryan Pietsch, ``WeWork's Valuation Has Fallen From $47 
Billion Last Year to $2.9 Billion'', Bus. Insider (May 18, 2020, 11:38 
AM) https://www.businessinsider.com/wework-valuation-falls-47-billion-
to-less-than-3-billion-2020-
5#::text=WeWork's%20valuation%20has%20fallen%20to,said%20in%20its%20earn
ings%20report.
---------------------------------------------------------------------------
    The alarming failure of SoftBank, an undeniably sophisticated 
investor in the private markets, to value WeWork should raise serious 
doubts as to whether a retail investor, even a sophisticated one, would 
fare any better in valuing a private company.
    Additionally, the absence of standardized and mandated information 
dissemination means that retail investors will be at a severe 
disadvantage relative to insiders and more powerful investors who can 
demand information or negotiate disclosures from private issuers. With 
no regulatory mechanism to force disclosures, there is no reason to 
believe that private companies will voluntarily and on a timely basis 
disclose information, even information material to the value or future 
existence of the company, such as the loss of a major client, the 
imposition of government sanctions, or pending bankruptcy.
    Likewise, whereas in the public markets Regulation Fair Disclosure 
prohibits selective disclosure of information, there is no corollary in 
the private markets. Private companies can provide information to 
institutional investors in compliance with contract-based information 
rights but refuse to provide the same information to retail investors. 
Retail investors, therefore, would be completely in the dark as to the 
operation, profitability, future, and value of private companies if 
allowed to invest in them. At a such a disadvantaged position, it would 
be impossible for retail investors to make an informed decision as to 
how to allocate their capital in the private markets.
C. Policy and Practical Considerations/Implications Regarding Greater 
        Retail Participation
    While the public markets are more suitable for retail investors 
versus the private markets, there are concerns that arise with regards 
to greater retail participation in the public markets. To be clear, 
these concerns do not equate with eliminating retail participation in 
the markets, but they do signal the need to consider how to address the 
ramifications on not only those investors, but also the overall 
operation and structure of the market. There are three issues I would 
like to raise.
    First, retail investors seem to have very limited understanding of 
the markets and products that they are trading. As a 2020 FINRA study 
notes, there were ``low levels of investment knowledge among all types 
of investors [in the study]-new and experienced . . . .'' \30\ The lack 
of knowledge among retail investors indicates that there is likely an 
underappreciation of the risks and costs of participating in the 
markets. Specifically, approximately 38 percent of new investors self-
assessed their investment knowledge as low/very low. \31\
---------------------------------------------------------------------------
     \30\ Id.
     \31\ FINRA Inv. Ed. Found., ``Consumer Insights: Money & 
Investing, Investing 2020: New Accounts and the People Who Opened 
Them'' 15-16, https://www.finrafoundation.org/sites/finrafoundation/
files/investing-2020-new-accounts-and-the-people-who-opened-them-1-
0.pdf.
---------------------------------------------------------------------------
    And, on the objective investment knowledge assessment, all investor 
types scored poorly. \32\
---------------------------------------------------------------------------
     \32\ Id. at 16.
---------------------------------------------------------------------------
    Indeed, it is particularly noteworthy given that the investors are 
participating in the public capital markets, where there is an 
abundance of information on the corporations in which they may trade. 
Yet, their understanding of the markets and their transactions were 
concerningly low. As the FINRA study concludes, the low level of 
knowledge among investors, particularly new investors, makes them 
``potentially unprepared to make sound investment decisions . . . .'' 
\33\ Thus, while increased retail participation is laudable, it is 
imperative to consider how to protect retail investors from unsuitable 
investments that they neither understand nor appreciate the risks.
---------------------------------------------------------------------------
     \33\ Id.
---------------------------------------------------------------------------
    Second, with the proliferation of zero-commission brokers and 
trading apps that ease access to the markets, there is the question: 
what are retail traders able to access with these modern-day brokers? A 
troubling aspect of the GameStop incident is that many traders were 
trading call options on the stock. \34\ The widespread use of options 
in GameStop trades reflects the ease with which retail investors are 
now able to trade complex financial products on margin, which is 
concerning for a few reasons.
---------------------------------------------------------------------------
     \34\ Chris McKhann, ``GME Stock Options Trading Explained: The 
Leverage of Long Calls Against the Volatility of GameStop'', Inv's. 
Bus. Daily (Feb. 1, 2021, 3:08 PM), https://www.investors.com/research/
options/gme-stock-options-buyers-got-rich-now-looking-puts.
---------------------------------------------------------------------------
    Options trading is complex and can entail significant risks for 
traders. Options are leveraged transactions that can amplify the gains 
and losses a trader experiences in the market. There are real policy 
issues at play when we consider whether retail investors ought to be 
able to trade on leverage-either at all or as easily as they currently 
can through some retail broker-dealers. Given than a large number of 
investors in a recent FINRA study stated that they were unaware of 
whether their account charged fees, \35\ how can we expect retail 
investors to appreciate the risks attendant with options trading and 
other complex financial instruments. \36\
---------------------------------------------------------------------------
     \35\ Williams and Young, supra note 22.
     \36\ We have also seen retail investors not sufficiently 
appreciate leveraged ETFs, where retail investors often believe that 
their investment performance is simply going to be the returns of some 
index multiplied by some factor, but that is not how those products 
typically work. Div. Econ. & Risk Analysis, SEC, ``Economics Note: The 
Distribution of Leveraged ETF Returns'' (2019), https://www.sec.gov/
files/DERA-LETF-Economics-Note-Nov2019.pdf.
---------------------------------------------------------------------------
    Investor understanding of the risks, costs, and potential fallout 
from options and leveraged trading is likely limited and, therefore, we 
should be more thoughtful about what financial products are available 
to retail investors. To be plain: democratization of finance cannot 
mean that investors, regardless of their experience and sophistication 
get access to options trading and margin accounts. This is not only 
foolish, but dangerous. Indeed, we need not look any further than the 
young man who committed suicide because he erroneously believed he had 
a negative balance of over $700,000. \37\ There must be an awareness of 
the limited knowledge and expertise of retail investors as they gain 
access to increasingly complex products.
---------------------------------------------------------------------------
     \37\ Maggie Fitzgerald, ``Robinhood Sued by Family of 20-Year-Old 
Trader Who Killed Himself After Believing He Racked Up Huge Losses'', 
CNBC (Feb. 8, 2021, 6:28 PM), https://www.cnbc.com/2021/02/08/
robinhood-sued-by-family-of-alex-kearns-20-year-old-trader-who-killed-
himself-.html (last updated Feb. 8, 2021, 9:26 PM).
---------------------------------------------------------------------------
    I would urge Congress, the SEC, and FINRA to reconsider the ready 
availability of complex financial products for retail investors. 
Further, Congress, the SEC, and FINRA should inquire into how investors 
are able to access margin accounts and options trading. Some reports 
have stated that users on certain broker platforms are defaulted into 
margin accounts, which raises significant concerns related to investor 
protection. \38\
---------------------------------------------------------------------------
     \38\ Letter from Tyler Gellasch, ``Health Markets Ass'n, to Maxine 
Waters, Chairwoman, Comm. Fin. Servs.'', Patrick McHenry, Ranking 
Member, Comm. Fin. Servs., Brad Sherman, Chairman, Subcomm. Inv. Prot. 
and Bill Huizenga, Ranking Member, Subcomm. Inv. Prot. 17 (Feb. 17, 
2021), https://healthymarkets.org/wp-content/uploads/2021/02/Letter-to-
HFSC-Hearing-2-17-21.pdf.
---------------------------------------------------------------------------
    Third, as retail traders become more active and potent participants 
in the market, it becomes necessary to consider how their presence and 
behaviors impact the broader markets. It may be tempting to think of 
the exuberance of retail investors for GameStop in January 2021 as a 
one-off event, but this would be short-sighted. Indeed, in June 2020 
retail investors piled into Hertz stock, even though the company was 
going through bankruptcy, increasing the stock price tenfold. \39\ 
Additionally, even as GameStop's price began its descent from its 
inexplicable highs, the stock price of other companies, such as AMC 
Theatres and BlackBerry, also began to increase because of retail 
investor interest. \40\
---------------------------------------------------------------------------
     \39\ David Welch and Steven Church, ``What It Means To Buy Stock 
in a Bankrupt Company Like Hertz'', Bloomberg (June 18, 2020, 5:00 AM), 
https://www.bloomberg.com/news/articles/2020-06-18/what-it-means-to-
buy-stock-in-a-bankrupt-company-like-hertz.
     \40\ Gunjan Banerji, Juliet Chung, and Caitlin McCabe, ``GameStop 
Mania Reveals Power Shift on Wall Street-and the Pros Are Reeling'', 
Wall St. J. (Jan. 27, 2021 6:46 PM), https://www.wsj.com/articles/
gamestop-mania-reveals-power-shift-on-wall-streetand-the-pros-are-
reeling-11611774663?mod=article-inline.
---------------------------------------------------------------------------
    With significant reform, it is fair to believe that these wild 
swings in stock prices owing to retail traders may become a recurring 
feature of the markets. As was seen with GameStop, the fallout is not 
limited to traders, but there are consequences for the clearinghouse 
and for brokers as they try to keep pace with heavy transaction and 
order flow. There may also be significant consequences on the companies 
whose stock prices are gyrating. But perhaps even more concerningly, 
these wild fluctuations may prove to be a significant deterrent for 
future long-term investment.
    Congress and the SEC should consider the extent to which the market 
and incentives structure that currently exists (such as payment for 
order flow, discussed below) contribute to the volatility accompanying 
increased retail interest in certain stocks.
    Further, as these peaks and troughs become more common in the 
markets, I would encourage Congress and the SEC to explore whether the 
existing framework can manage the risks and consequences that accompany 
growing retail participation in the markets. To the extent it cannot, 
the answer ought not to lie with limiting retail participation, as 
seems to have happened recently when some broker-dealers suspended 
trading in highly volatile stocks. Rather, the onus should be placed on 
clearinghouses and brokers to do a better job of anticipating and 
responding to potential market volatility. To this end, I encourage 
Congress, the SEC, FINRA, and the DTCC to consider updates to broker 
capital requirements, margin call processes, and settlement processes.
III. Payment for Order Flow
    A contributing factor to the recent market volatility that raises 
policy and regulatory concerns is payment for order flow (PFOF). PFOF 
is the practice by which brokers are compensated for routing client 
orders to third parties, such as wholesalers and market makers, for 
execution. \41\ Through PFOF, retail brokers' commissions are 
subsidized or substituted by payments received from third parties who 
are able to profitably trade against those clients' orders.
---------------------------------------------------------------------------
     \41\ Alex Rampell and Scott Kupor, ``Breaking Down the Payment for 
Order Flow Debate'', Andreessen Horowitz (Feb. 17, 2021), https://
a16z.com/2021/02/17/payment-for-order-flow.
---------------------------------------------------------------------------
    During a Congressional hearing last month, Robinhood's CEO 
testified that over half of the firm's revenues came from PFOF. \42\ 
With brokers, wholesalers, and market makers earning such high profits 
from PFOF, one is left to wonder if investors are truly better off 
under this model.
---------------------------------------------------------------------------
     \42\ ``Game Stopped? Who Wins and Loses When Short Sellers, Social 
Media, and Retail Investors Collide'': Hearing Before the H. Comm. on 
Fin. Servs., 117 Cong. (Feb. 18, 2021) (statement of Vladimir Tenev, 
CEO, Robinhood Markets, Inc.), prepared remarks available at https://
financialservices.house.gov/uploadedfiles/hhrg-117-ba00-wstate-tenevv-
20210218.pdf.
---------------------------------------------------------------------------
    PFOF is a concerning practice that has been allowed to continue in 
the U.S. securities markets, although its costs to both retail 
investors and the markets overall outweigh the supposed benefits they 
receive. PFOF is innately conflicted, placing retail investors in an 
inferior position vis-a-vis their broker. Further, claims that PFOF 
results in price improvement are questionable at best and it is more 
likely that retail investors are often paying higher prices for their 
trades than they would if those orders were exposed to the exchanges. 
Lastly, PFOF increases market segmentation and decreases liquidity, 
which diminishes market stability and efficiency. Each of these is 
discussed in greater detail below.
A. PFOF Is Innately Conflicted and Opaque
    Broker-dealers are bound by a duty of loyalty to their clients. 
This duty includes the duty to act in the best interests of their 
clients and obtain the best terms for their clients when executing 
trades. This duty of loyalty is delineated through SEC and FINRA rules, 
and numerous cases. PFOF directly undermines this duty by allowing 
brokers to route client orders based on agreements with third parties, 
allowing these third parties to profit at the expense of clients.
    Previously, broker revenue was primary earned from their customers 
to whom they owe such a duty, aligning the interests of the brokers 
with their clients'. PFOF undermines this relationship because it pits 
the brokers' primary revenue source directly against the clients to 
whom they owe the duty of best execution. Under the PFOF model, brokers 
are incentivized to put their own profit-seeking interests above their 
clients in deciding where to route client orders. This practice greatly 
undermines the broker-investor relationship and leaves retail investors 
in a worse position.
    Additionally, it is questionable whether brokers are truly getting 
the best execution for clients if they receive PFOF. To the extent 
brokers are required to put clients' interests above incentives for 
trade routing, as required by FINRA's rules regarding best execution, 
\43\ PFOF is fundamentally at odds with this duty. Recent, separate 
actions by FINRA \44\ and the SEC \45\ against Robinhood for failure to 
achieve best execution, for example, would seem to bear this out.
---------------------------------------------------------------------------
     \43\ Regulatory Notice 15-46: ``Guidance on Best Execution 
Obligations in Equity, Options and Fixed Income Markets, FINRA'' (Nov. 
2015), https://www.finra.org/rules-guidance/notices/15-46.
     \44\ See, e.g., Letter of Acceptance, Waiver, and Consent No. 
2017056224001 from Robinhood Fin., LLC., to Dept. of Enf't., FINRA 
(Dec. 19, 2019), https://www.finra.org/sites/default/files/2019-12/
robinhood-awc-121919.pdf.
     \45\ ``In the Matter of Robinhood Fin., LLC'', Admin. Proc. File 
No. 3-20171 (Dec. 17, 2020), https://www.sec.gov/litigation/admin/2020/
33-10906.pdf.
---------------------------------------------------------------------------
    Another related issue with the PFOF structure is the lack of 
transparency. SEC rules require brokers to report their PFOF 
statistics, including net payments received from market makers for 
trade execution and the rate of PFOF per 100 shares. These disclosures, 
which were recently amended in 2020, provide data in the aggregate that 
make it impossible for individual retailers to know specific, 
individualized information.
    This lack of information makes it difficult for retail investors to 
compare costs across brokers and to appreciate the true costs of their 
trading activities.
    Importantly, even though the SEC requires that these reports are 
made available to customers, it can be nearly impossible to locate them 
on the broker's website. \46\ And, there are questions as to whether 
the reports some brokers provide even comply with the SEC regulations. 
It is imperative that the SEC mandate additional disclosure around this 
issue in order to make investors more informed about the costs of their 
allegedly free trading accounts.
---------------------------------------------------------------------------
     \46\ Letter from Tyler Gellasch, Healthy Markets Ass'n, to Brent 
J. Fields, SEC, at 7-8, (Sept. 26, 2016), https://
healthymarkets.wpengine.com/wp-content/uploads/2018/04/09-26-16-HM-
letter-Order-Handling-Disclosure-rules.pdf; Annette L. Nazareth, 
Gregory Rowland, Zachary J. Zweihorn, and Mark A. Sater, ``SEC Adopts 
Enhanced Order Handling Disclosure Requirements5'', FINREG: Davis Polk 
Insights on Fin. Reg. (Nov. 27, 2018), https://www.finregreform.com/
single-post/2018/11/27/sec-adopts-enhanced-order-handling-disclosure-
requirements.
---------------------------------------------------------------------------
    Lastly, Congress should explore whether PFOF ought to be banned 
given its inherent incompatibility with best execution and brokers 
acting in the best interest of their clients. If a broker is able to 
cover its trading expenses through receipt of fractions of a penny per 
share from a third party, could it not simply charge its actual 
customer a similar price?
    A ban on PFOF is unlikely to result in the end of retail investor 
participation in the market. But it can result in less conflicted order 
routing and adoption of a more transparent pricing model. Other 
jurisdictions, such as the United Kingdom and Australia, have banned 
PFOF because it is innately conflicted and of questionable benefit to 
investors. \47\ FINRA has begun an examination of PFOF and the zero-
commission business model because of their problematic incentive 
structures. \48\ In light of the concerning features of PFOF, Congress 
and the SEC should explore whether its continuation is truly in the 
best interest of retail investors or in the best interest of brokers, 
wholesalers, and market makers.
---------------------------------------------------------------------------
     \47\ CFA Inst., ``Payment Order Flow: Internalisation, Retail 
Trading, Trade-Through Protection & Implications for Market Structure'' 
2 (2016), https://www.cfainstitute.org/-/media/documents/issue-brief/
payment-for-order-flow.ashx (discussing the U.K. ban on PFOF).
     \48\ ``Targeted Examination Letter on Zero Commissions'', FINRA 
(Feb. 2020), https://www.finra.org/rules-guidance/guidance/targeted-
examination-letters/zero-commissions.
---------------------------------------------------------------------------
B. Price Improvement Is Questionable
    One of the main arguments in favor of PFOF is that the third 
parties to which brokers route orders purportedly provide retail 
customers with ``price improvement.'' Often, market participants will 
(somewhat misleadingly) claim that ``price improvement'' means that 
retail customers are getting better prices than are available on 
exchanges. For example, Robinhood's CEO testified: ``In fact, Robinhood 
customers received more than $1 billion in price improvement-the price 
they received compared to the best price on a public exchange-in the 
first half of 2020.'' \49\
---------------------------------------------------------------------------
     \49\ ``Game Stopped? Who Wins and Loses When Short Sellers, Social 
Media, and Retail Investors Collide: Hearing Before the H. Comm. on 
Fin. Servs., 117 Cong. (Feb. 18, 2021) (statement of Vladimir Tenev, 
CEO, Robinhood Markets, Inc.), prepared remarks available at https://
financialservices.house.gov/uploadedfiles/hhrg-117-ba00-wstate-tenevv-
20210218.pdf.
---------------------------------------------------------------------------
    But that is not what price improvement is often defined to 
calculate. Rather, ``price improvement,'' as defined by SEC Rule 605 is 
not measured from the best available prices on exchanges, but rather 
the best available protected quote. \50\ Odd-lot quotes (i.e., buy/sell 
offers for less than 100 shares) are generally not protected and, 
therefore, they are not used to calculate price improvement, even if 
they are a better price than the protected quote. Consequently, price 
improvement claims are often overstated and fail to reflect that many 
investors' executions were not at the best available prices, but were 
instead at prices that were inferior to odd-lot quotes on the 
exchanges.
---------------------------------------------------------------------------
     \50\ SEC Rule 605, FINRA, https://www.finra.org/rules-guidance/
guidance/sec-rule-605 (last visited Mar. 7, 2021).
---------------------------------------------------------------------------
    Studies have also raised questions as to whether retail investors 
receive the best price when their orders are routed based on PFOF. A 
study by the U.K. financial regulator found that in removing broker 
payments for order routing, investor execution at the best available 
price increased from 65 percent to 90 percent. \51\ A more recent study 
based on U.S. transactions in GameStop during the January trading 
frenzy estimated that price improvement estimates were cut in half when 
odd lots on just Nasdaq were included in the calculations. \52\
---------------------------------------------------------------------------
     \51\ CFA INST., supra note 47, at 2.
     \52\ Robert P. Bartlett, III & Justin McCrary, Modernizing Odd Lot 
Trading (on file with author).
---------------------------------------------------------------------------
    To improve the calculation of price improvement and actually enable 
investors to receive best execution, the SEC should immediately update 
Rule 605 to reflect odd-lots in the calculation of price improvement. 
There is little to no justification in the current market for excluding 
odd-lot quotes from the calculation of price improvement. And, there is 
even less justification for excluding it from determining the best 
available price for trade execution when the aggregated available odd 
lots are at least as great as a customer order.
    It is also worth noting that it appears that different retail 
broker dealers appear to negotiate different amounts of price 
improvement for their customers. Further, the amounts of price 
improvement seem to be, in many cases, inversely related to the amount 
of payments received by the broker as part of its PFOF. It seems as 
though it should be obvious, but if one retail broker is routinely 
providing its customers with better prices than another, they can't 
both be providing ``best execution.''
    Lastly, as discussed below, even using a more accurate calculation 
methodology, the ``price improvement'' statistic may still not reflect 
an improvement over a price that could have been received if the order 
had been routed to the lit markets. That's because if a retail order is 
routed to an exchange, it is likely that the order could receive mid-
point trade executions that would offer far better prices than the 
price improvement currently offered.
C. Price Discovery and Market Liquidity Are Reduced
    Another consequence of PFOF is that it results in significant 
market segmentation. Retail orders routed to a market maker, for 
instance, are typically filled by the market maker without ever trading 
on the exchanges. Given that retail trades account for an ever-
increasing segment of the markets, isolating retail transactions to 
market makers with whom brokers have order routing arrangements reduces 
liquidity and price discovery for the rest of the markets.
    In adopting Regulation National Market System (''Reg NMS''), the 
SEC sought to create a fair and transparent marketplace in which 
investors could trade at the best price available across the different 
venues trading a security. \53\ The reality, however, is that the 
securities markets are more fragmented today than they were prior to 
the enactment of Reg NMS. There are over a dozen exchanges and dark 
pools, and hundreds of broker-dealers who fill customer order 
internally or route them according to prior arrangements. \54\ Further 
compounding this fragmentation, it is estimated that close to 100 
percent of retail orders are internalized and, therefore, never 
interact with the broader market in execution. \55\
---------------------------------------------------------------------------
     \53\ Div. Trading & Mkts., Responses to Frequently Asked Questions 
Concerning Rule 611 and Rule 610 of Regulation NMS, SEC, https://
www.sec.gov/divisions/marketreg/nmsfaq610-11.htm (last updated Apr. 4, 
2008).
     \54\ CFA Inst., ``Dark Pools, Internalization, and Equity Market 
Quality'' 2 (2012), https://www.cfainstitute.org/en/advocacy/policy-
positions/dark-pools-internalization-and-equity-market-quality.
     \55\ Id. at 16.
---------------------------------------------------------------------------
    Over the past several years, the amount of exchange trading has 
steadily declined as retail trading has increased. Over the past 
several weeks, as much as half of all trading has been occurring off-
exchange. \56\ This means that those orders are not contributing to 
price discovery. Pension funds, mutual funds, and other investors are 
generally unable to interact with them. Further, as discussed above, 
retail customers may not be receiving the best price available.
---------------------------------------------------------------------------
     \56\ Alexander Osipovich, ``GameStop Mania Highlights Shift to 
Dark Trading'', Wall St. J. (Feb. 12, 2021, 5:33 AM), https://
www.wsj.com/articles/gamestop-mania-highlights-shift-to-dark-trading-
11613125980.
---------------------------------------------------------------------------
    Relatedly, segmentation of retail transactions has reduced market 
liquidity, making it harder for institutional investors to trade. \57\ 
Retail trades are inaccessible sources of liquidity, which has a 
significant effect on the cost to trade popular stocks that have a high 
percentage of retail ownership. Apple, for example, has an estimate 
retail share of 38 percent, which is unavailable to most institutional 
investors because the trades are fulfilled internally. As a result, 
institutional investors seeking to trade stock with high retail 
ownership face significantly higher costs because of diminished 
liquidity and increased volatility. \58\
---------------------------------------------------------------------------
     \57\ ``Meme Stocks: Inaccessible Trading Share, Trading Cost, and 
Risk'', Babelfish Analytics (Feb. 5, 2021), https://
www.babelfishanalytics.com/news/2021/2/4/meme-stocks-inaccessible-
trading-share-trading-cost-and-risk.
     \58\ Id.
---------------------------------------------------------------------------
Conclusion
    Today, it is easier, cheaper and faster to trade more complex and 
leveraged financial products that ever before. This new market reality 
requires that we rethink the risks that accompany these developments 
and, in so doing, consider what types of markets we want to create and 
encourage from a policy perspective. Promoting and strengthening market 
stability and integrity is essential to the market fulfilling its 
fundamental purpose: efficiently allocating capital to businesses, 
driving the economy, and enabling investors to enjoy reasonable returns 
on their capital. Recent events have highlighted concerns and 
shortcomings in the existing market structure, which must be 
comprehensively addressed in order to ensure that the markets remain 
fair, stable, and accessible companies seeking capital and, most 
importantly, all investors.
                                 ______
                                 
              PREPARED STATEMENT OF RACHEL J. ROBASCIOTTI
      Founder and Chief Executive Officer, Adasina Social Capital
                             March 9, 2021
    Mr. Chairman Brown, Ranking Member Toomey, and Members of the 
Committee: Good morning and thank you for inviting me to testify before 
this Committee. It is my great honor. My name is Rachel Robasciotti and 
I hold leadership positions at two SEC Registered Investment Advisory 
firms. I am the Founder and CEO of Adasina Social Capital, where we 
manage an exchange-traded fund with the ticker symbol JSTC. It holds 
over 800 stocks, but is accessible to everyday investors at a price of 
about $16 per share. I am also the Director of Advocacy & Engagement 
for Abacus Wealth Partners, a firm with $3.8 billion in assets and no 
minimum account size for its clients.
    In both roles, I serve hardworking, everyday Americans. Your 
constituents and my clients are the same people.
    I have also worked in financial services for almost 22 years, so I 
take the long view of market events. I have seen everything from the 
ill-fated dot-com boom of 2000 through the Great Recession and the most 
recent GameStop-Robinhood episode in January. I understand the players 
in the market and, in this most recent situation, there are three 
groups to consider.
    1. Hedge Funds: Institutions that primarily manage money for 
wealthy, accredited investors \1\ and are known for their risky 
strategies and high returns.
---------------------------------------------------------------------------
     \1\ Securities and Exchange Commission, Office of Investor 
Education and Advocacy, ``Investor Bulletin: Hedge Funds'', SEC Pub. 
No. 139 (February 2013).
---------------------------------------------------------------------------
    2. Redditors: Tech-enabled young people, using commission-free 
trading, who banded together to outwit the hedge funds they felt had an 
unfair advantage.
    3. Everyday Americans: Hard-working people with long-term 
retirement savings invested in the stock market. These people do not 
have time to be sophisticated investors and were mostly anxious, 
confused, and frustrated.
    But, as an investment professional, what happened here was familiar 
to me.
    When the GameStop-Robinhood episode occurred in January, I was 
immediately reminded of the MIT Blackjack Team of the 1990s, when a 
group of students banded together to break the bank at several large 
casinos. \2\ They realized that if they worked together, they could win 
substantially more money than the average gambler. So, using math 
skills and technology, they coordinated to quickly and strategically 
place large bets against the house.
---------------------------------------------------------------------------
     \2\ Noah Goldman, ``How MIT Students Broke the Bank in Vegas'', 
ABC News (January 6, 2006).
---------------------------------------------------------------------------
    It is easy to see the obvious similarities between the two 
situations. Like the MIT students, the Redditors in January were young, 
knowledgeable people with high appetites for risk who chose to 
collectively speculate by making quick bets against a larger player 
with a perceived advantage.
    On the other hand, like the casinos, the hedge funds are large 
institutions with specialized knowledge about the game who some say 
routinely use their size to tip the odds in their favor.
    What is not obvious, whether in the casino or the stock market, is 
what the wealthy institutions and upstarts have in common. They are all 
fast-moving, high-risk speculators with more skills and tools than the 
average person.
    But there is a problem here for the stock market. When fast-moving, 
high-risk speculators dominate, we have a classic recipe for market 
disruptions. What we saw in January with GameStop and Robinhood is what 
we saw during the Great Recession with Wall Street churning out 
subprime, mortgage-backed securities.
    Market disruptions like this are a problem because, as stated by 
SEC Commissioners on January 29th, \3\ ``...extreme stock price 
volatility has the potential to expose investors to rapid and severe 
losses and undermine market confidence.''
---------------------------------------------------------------------------
     \3\ U.S. Securities and Exchange Commission, ``Statement of Acting 
Chair Lee and Commissioners Peirce, Roisman, and Crenshaw Regarding 
Recent Market Volatility'', Public Statements, U.S. Securities and 
Exchange Commission (January 29, 2021).
---------------------------------------------------------------------------
    Unfortunately, this volatility does not impact everyone equally. 
Let me paint the picture of what the everyday investor experienced. 
Imagine a two-job household with a couple of kids, adults working hard 
to make ends meet and save enough for the future. They don't have a 
professionally managed pension to fall back on for retirement, because 
so few pensions now exist. \4\ They know that Social Security benefits 
their parents receive aren't enough to cover most retiree's basic 
needs. \5\ And, for several decades now, the economy has only offered 
these savers historically low-interest rates, which means that putting 
their money in low-risk savings accounts, CDs, or bonds barely makes 
them enough to keep up with inflation. \6\
---------------------------------------------------------------------------
     \4\ Barbara A. Butrica, Howard M. Iams, Karen E. Smith, and Eric 
J. Toder, ``The Disappearing Defined Benefit Pension and Its Potential 
Impact on the Retirement Incomes of Baby Boomers'' Office of Retirement 
and Disability Policy, Social Security Administration, Social Security 
Bulletin, Vol. 69, No. 3 (October 2009).
     \5\ Jan Mutchler and Yang Li, ``The Gap Remains: Social Security 
Benefits Continue to Fall Short of Covering Basic Cost of Living for 
Older Americans, 2015-2020'', Center for Social and Demographic 
Research on Aging Publications, No. 48, University of Massachusetts 
Boston (November 2020).
     \6\ The Economist, ``The Savers Dilemma: Low Interest Rates Leave 
Savers With Few Good Options'', Finance & Economics, The Economist 
(October 15, 2020).
---------------------------------------------------------------------------
    This leaves investing in the stock market as their only option. It 
is the only way their savings can grow enough to provide for the 
future. So, they are forced into the ``stock market casino'' with their 
life savings. And they are being required to play against armies of 
sophisticated, high-risk hedge funds and Redditors duking it out for 
dominance. With smaller amounts, that represent all that they have to 
invest, sustaining significant losses (or even the perception of 
losses) is devastating. It makes them lose confidence and want to opt 
out altogether. But we know they can't leave the casino.
    As an investment professional who works for everyday investors, and 
as senators with these same people as your constituents, we must fix 
the system for them. We need to maintain fair, orderly, and efficient 
markets that serve as a reasonable place for the average American to 
invest their life savings. And we have a duty to protect these 
investors from the crossfire of fast-moving, high-risk speculators.
                                 ______
                                 
                PREPARED STATEMENT OF TERESA GHILARDUCCI
  Bernard L. and Irene Schwartz Professor of Economics, The New School
                             March 9, 2021
    Thank you for inviting me, Chairman Brown and Ranking Member Toomey 
and Members of the Committee.
    I am the Bernard Schwartz Chair of Economics at The New School in 
New York City, coming to that faculty in 2007 after teaching at the 
University of Notre Dame for 25 years. I received my PhD from UC 
Berkeley and serve as a court-appointed independent trustee of the 
Goodyear tire retirees' $900 million health care trust fund and the 
autoworkers $60 Billion retiree health fund.
    My office hours are typically quiet moments huddling over 
equations. But over the past few years, students have been bubbly, 
asking about their trades on the phone-friendly trading platform, 
Robinhood. The young are told to buy stocks and hold them--but they 
absorbed the first point and missed the second.
    Trading on Robinhood is a game with psychologically powerful 
intermittent rewards and is disconnected to long term wealth 
accumulation. Phone Apps makes trading easy and cheaper and 
superficially seems to open securities markets to many more people but 
they do not produce wealth.
    I welcome today's hearing seeking to protect retail stock buyers 
from casino-type trades. And I want to emphasize that Americans' wealth 
does not come from retail stock trading. I am here to testify where 
Americans really get their wealth. \1\
---------------------------------------------------------------------------
     \1\ Researchers at The New School, Michael Papadopoulos and 
Siavash Radpour, constructed the wealth data and Owen Davis helped with 
the Robinhood discussion.
---------------------------------------------------------------------------
    As you might guess, home equity and retirement wealth including 
Social Security \2\ are the largest components of wealth \3\--they make 
up 88 percent \4\of the wealth held by near retiree households in the 
lower half of the wealth distribution; 78 percent for the middle class, 
and 43 percent for those in the top 10 percent (Table 2).
---------------------------------------------------------------------------
     \2\ We add the shares in the net value of primary residence, 
present value of expected Social Security benefits, value of DC plans 
and IRAs, and present value of defined benefit benefits.
     \3\ Half of near-retirement households (with members aged 52 or 
over), those in the bottom half of the wealth distribution have less 
than $296,000 wealth, including the value of their pensions and Social 
Security benefits. The median wealth for the middle class--those in the 
next 40 percent of the wealth distribution--is $1.02 million. 
Households in the top 10 percent have a median net wealth of over $3.2 
million (Table 1).
     \4\ Adding 19%+58%+11%=88%
---------------------------------------------------------------------------
    You might be surprised that Social Security is the most important 
source of household wealth for half of all households with workers 
nearing retirement. Social Security represents 58 percent of net wealth 
for near retirees in the bottom half of the wealth distribution; 27 
percent for the middle class; and 7 percent for the top 10 percent. \5\
---------------------------------------------------------------------------
     \5\ A note about the racial wealth gap and Social Security. 
Whites, on average, have 83 percent more net wealth (Table 3) that non-
whites. But the racial Social Security wealth gap is only 13 percent--
Social Security is the most equitably distributed source of wealth for 
Americans nearing retirement. Whites have 8 times the wealth in 
business, and 4 times the wealth in directly held stocks, 58 percent 
more housing wealth and 2.4 times the retirement plan wealth compared 
to non-whites
---------------------------------------------------------------------------
    In contrast, directly owned stocks (and bonds) make up a relatively 
small share of near retirees' wealth at 8 percent. Only 24 percent of 
older households own stocks directly, outside of their retirement 
account and that ownership is concentrated at the top. Only 10 percent 
of those in the bottom half of the wealth distribution own stocks, less 
than a third of the middle class.
    And the wealthy are not rich because they directly own stocks. 
Though 70 percent of the top 10 percent directly own stocks, it is only 
13 percent of their wealth. (They own businesses (15 percent of their 
wealth), other real estate (15 percent of their wealth), and have 25 
percent of their wealth in retirement accounts and pension plans.)
    As Nobelist Robert Shiller recent book points out stock trading 
feeds a narrative, a story about wealth, trading is exciting because 
stocks fluctuate. Stories about getting rich on stocks produce a 
fiction that stock trading creates wealth, when, in fact, retail 
investors fuel bubbles.
    Defenders of Robinhood and widespread trading have purchase because 
in the COVID recession people who own stocks have done well, which 
heightens the fear of missing out for those not buying stocks. The 
reality is they are being left out because they don't have access to 
retirement accounts, which is where most of us who own stocks hold 
them. Retirement accounts are invested in diversified portfolios 
managed by institutional investors and professionals who can manage the 
risks that come with investments in private equity, etc., and other 
complex instruments.
    But more than half of workers do not have a retirement plan at 
work, which means many households do not have any investment in stocks 
or are accumulate private wealth for their retirement. (Radpour, 
Papadapoulos, and Ghilarducci 2021).
    Any retail brokers' claims that trading democratizes access to 
wealth only takes advantage of people's fears. I do not recommend 
opening up high-risk and expensive alternative investments to the 
retail investor it can make risk and inequality worse. \6\
---------------------------------------------------------------------------
     \6\ Demand for lottery-like stocks increases during economic 
downturns and is more prevalent among vulnerable groups: poor young 
men, African Americans and Latinos. (Kumar 2009) Some types of retail 
trading resemble gambling disorders. (Grall-Bronnec et al. 2017). New 
technologies make stock trading more like gambling. Apps like Robinhood 
make gambling stocks more accessible. Two to three percent of gamblers 
become addicted. Trading can become an addiction, akin to gambling 
addiction.
---------------------------------------------------------------------------
    Robinhood founders frequently invoke their experience as part of 
the Occupy movement to explain why they want to democratize finance. 
But safe and professionally managed diversified investments, not 
trading apps, are the path to economic security. Successful investors 
know that ``time in the market'' and diversification, which are among 
the many benefits of professionally managed retirement plans, are what 
works. Unlike ``timing the markets,'' which does not work, yet is that 
is what trading apps encourage.
    We need innovations in public policy to give more Americans access 
to what we know works--professionally managed retirement coverage that 
allows everyone to benefit from the stock markets the same way you and 
I do in Thrift Savings Plan, in a private or public defined benefit 
plan, or in my pension plan Teachers Insurance Annuity Association.
Wealth Holdings
    The typical household whose members are nearing retirement earn 
about $65,000, their average wealth of over $1 million is barely 
relevant since the very wealthy pull up the average beyond reality. 
Because most Americans do not have significant wealth until their 
fifties, I focus today on those nearing retirement age, defined as 
households with one worker 52 or over.
    The typical near-retirement household in the United Statesearns 
between $55,000 to $75,000 per year and has an average net wealth of 
$1.67 million. I don't report the income distribution tables, but am 
reporting the wealth distribution. When dividing up the over near 
retiree population This sounds like a large number, but--as you know--
averages hide important differences (as witnesses testified in your 
March 3 hearing) and means and medians don't give you a complete 
picture. So I am going to report wealth in terms of wealth 
distribution, looking at the differences between those in the bottom 50 
percent, the next 40 percent and the top 10 percent of the wealth 
distribution. (These are categories recommended by French economist 
Thomas Piketty (2015).
    For those in the bottom half of the wealth distribution, the median 
net wealth is $295,724; for those in the next 40 percent, it is 
$1,019,239; and for those in the top 10 percent, median net wealth is 
$3.19 million. You may be surprised that home equity in a primary 
residence is not the largest share of wealth across all income groups. 
It is only 12 percent of net wealth for those in the top 10 percent 
(they own other real estate) and about 20 percent for the bottom 90 
percent.
    Social Security is the predominant source of household wealth for 
near retirees. As a promised stream of income for the rest of your 
life, indexed to inflation, Social Security represents 24 percent of 
net wealth, which falls as income goes up. Social Security matters much 
more for lower wealth holders who are likely lower earners: 58 percent 
of total wealth is in Social Security for the bottom half of the wealth 
distribution, 27 percent for the middle and 7 percent for those at the 
top. Retirement savings in the form of defined contribution savings 
plans and individual retirement accounts are next, representing 17 
percent of households net wealth, only 8 percent on the bottom, 21 
percent for middle and 16 percent for those on the top. Traditional 
pensions, or benefits from a defined benefit plan, represent only at 8 
percent because they have been replaced by 401(k)s, only 3 percent for 
the bottom and 9 percent for the top half.






Policy Implications
    Overall, I think the focus on broader wealth accumulation and 
retirement assets is the right way to go. We need to add accrued Social 
Security benefits to retirement wealth which helps reduce the 
retirement wealth gap between low and high earners and keeps retirees 
out of poverty, American workers still face a wealth crisis. 
Policymakers need to strengthen and expand Social Security and mandate 
employer-sponsored retirement plans to ensure universal coverage and 
adequate retirement income. Policymakers need to pay attention to the 
risks of student debt and home mortgages. We need better regulation of 
Fin tech to be sure, the future generation depends on our stewardship. 
The most important source of savings, though, is income, savings are a 
residual from people's earnings. They can't buy a house and contribute 
to a pension without decent earnings. This is not a rhetorical point, 
it is rooted in economic research on savings. We need to increase 
minimum wage and raise wages.
Social Security Wealth
    Social Security reduces--but does not eliminate--retirement wealth 
inequality. For typical workers age 51-56, accrued Social Security 
benefits exceed employer-sponsored retirement wealth. Median Social 
Security wealth amounts to $81,900 compared with $67,000 in employer-
sponsored retirement plans.
    At ages 51-56, the typical low-wage worker (in the lowest 20 
percent of earnings) has no retirement wealth. The typical high-wage 
worker (in the highest 20 percent of earnings) has wealth equal to 
almost two and a half times their earnings.
    Adding accrued Social Security benefits to retirement wealth 
decreases the retirement wealth gap between low and high earners from 
two and a half times earnings to just over half a year's earnings (see 
Ghilarducci, Radpour, and Webb 2020).
    To calculate Social Security wealth for this testimony, I impute a 
career earnings trajectory for each worker using two factors: (1) 
current earnings in the survey year [2016] and (2) scale factors from a 
Social Security Administration Actuarial Note published by Clingman and 
Burkhalter (2016). This career earnings trajectory is then used to 
calculate AIME and PIA, giving us the Social Security Retired Worker 
benefit. We assume all workers claim the Retired Worker benefit. We 
assume a worker collects benefits for 13 years, and therefore multiple 
annual benefits by 13--the actuarial factor (Carlson 2020), giving us 
an estimate for Social Security wealth.
Trading and Investment
    It's well-known that individual investors underperform on average, 
and app-based day-trading may be making this performance gap between 
underperforming app trading and other portfolios worse. In general, 
retail investors' returns are lower on average than returns to low-cost 
index funds and certainly less rewarding in terms of risk--adjusted 
returns to a professionally managed defined benefit portfolio. (Barber 
and Odean, 2013).
    Retail investors tend to sell good stocks too soon and hold bad 
stocks too long--the endowment effect--and engage in myopic and salient 
trading patterns (a recent event is viewed as more likely to happen 
than it is) and they tend not to be diversified enough, professionals 
with a broad information base have more holdings.(Barber and Odean, 
2013).
    Recent evidence using Robinhood data finds that frequently bought 
stocks on the app seriously underperform due to what authors call 
``extreme herding'' events (Barber et al., 2021). And a recent study 
using data on German households found that switching from desktop 
computers for investing to smartphone apps led investors to ``increased 
purchasing of riskier and lottery-type assets and chasing past 
returns'' (Kalda et al., 2021).
    Fintech is not all bad--Apps like Betterment, Wealthfront, and 
Acorns are geared more toward patient, long-term investing than 
impulsive day trading. Owen Davis, graduate student at the New School 
helped with this section.
References:
Barber, B.M., & Odean, T. (2013). ``The Behavior of Individual 
    Investors'', In Handbook of the Economics of Finance, Vol. 2, pp. 
    1533-1570.
Barber, B.M., Huang, X., Odean, T., and Schwarz, C. (2021). ``Attention 
    Induced Trading and Returns: Evidence From Robinhood Users''. 
    Available at SSRN: https://ssrn.com/abstract=3715077 or http://
    dx.doi.org/10.2139/ssrn.3715077.
Carlson, B. (2020). ``How To Value Social Security''; Clingman, M., 
    Burkhalter, K. (2016). ``Scale Factors for Hypothetical Earnings 
    Examples Under the 2016 Trustees' Report Assumptions''. Social 
    Security Actuarial Note 2016-3. https://www.ssa.gov/oact/NOTES/
    ran3/an2016-3.pdf.
Ghilarducci, T., Radpour, S., and Webb, A. (2020). ``Social Security 
    Reduces Retirement Wealth Inequality'' Schwartz Center for Economic 
    Policy Analysis and Department of Economics, The New School for 
    Social Research, Policy Note Series.
Grall-Bronnec, M., Sauvaget, A., Boutin, C., Bulteau, S., Jimenez-
    Murcia, S., Fernandez-Aranda, F., Challet-Bouju, G., and Caillon, 
    J. (2017). ``Excessive Trading, A Gambling Disorder in Its Own 
    Right? A Case Study on a French Disordered Gamblers Cohort''. 
    Addictive Behaviors, 64, 340-348. https://doi.org/10.1016/
    j.addbeh.2015.12.006
Kalda, A., Loos, B., Previtero, A., and Hackethal, A. (2021). ``Smart 
    (Phone) Investing? A Within Investor-Time Analysis of New 
    Technologies and Trading Behavior'' (No. w28363). National Bureau 
    of Economic Research.
Kumar, A. (2009), ``Who Gambles in the Stock Market?'' The Journal of 
    Finance 64: 1889-1933. https://doi.org/10.1111/j.1540-
    6261.2009.01483.x
Piketty, T. (2015). ``About Capital in the Twenty-First Century''. 
    American Economic Review 105 (5):48-53.
Radpour, S., Papadopoulos, M., and Ghilarducci, T. (2021) ``Trends in 
    Employer-Sponsored Retirement Plan Access and Participation Rates: 
    Reconciling Different Data Sources'', Schwartz Center for Economic 
    Policy Analysis and Department of Economics, The New School for 
    Social Research, Research Note Series 2021-01.
Shiller, R. (2020) ``Narrative Economics: How Stories Go Viral and 
    Drive Major Economic Events''. Princeton University Press.
Not referenced but relevant:
Federal Reserve (2020). ``Changes in U.S. Family Finances from 2016 to 
    2019: Evidence From the Survey of Consumer Finances''. Federal 
    Reserve Bulletin, Vol. 106.
Ghilarducci, T. (2020) ``Most Americans Don't Have a Real Stake in the 
    Stock Market'', Forbes.
                                 ______
                                 
                PREPARED STATEMENT OF MICHAEL S. PIWOWAR
   Executive Director, Milken Institute Center for Financial Markets
                             March 9, 2021
    Good morning. Thank you Chairman Brown, Ranking Member Toomey, and 
Members of the Committee for inviting me to testify today.
    My name is Mike Piwowar, and I am the Executive Director of the 
Milken Institute Center for Financial Markets. \1\ I had the pleasure 
of serving on this Committee's staff as Chief Economist for Senator 
Shelby and Senator Crapo. I also served as a Visiting Academic Scholar, 
Senior Financial Economist, Commissioner, and Acting Chairman of the 
U.S. Securities and Exchange Commission (``SEC'' or ``Commission''). I 
am testifying today on my own behalf.
---------------------------------------------------------------------------
     \1\ The Milken Institute is a nonprofit, nonpartisan think tank 
that promotes evidence-based research that serves as a platform for 
policymakers, industry practitioners, and community members to come 
together in catalyzing practical solutions to challenges we face both 
here in the U.S. and globally. The Center for Financial Markets 
conducts research and constructs programs designed to facilitate the 
smooth and efficient operation of financial markets--to help ensure 
that they are fair and available to those who need them when they need 
them.
---------------------------------------------------------------------------
    Now that the dust has settled after the January trading frenzy on 
Gamestop and other so-called meme stocks, I am glad that you called 
this hearing on the state of retail investing.
    Retail investors enjoy more choices and face lower costs and 
barriers when investing their hard-earned savings than ever before.
    Retail investors can invest directly in securities through 
brokerage accounts. Competition among brokers has led to commission-
free trading. Competition among exchanges, alternative trading systems 
(ATSs), and market makers has led to the best market quality 
environment--transaction costs are low, market depth is high, and 
execution speeds are fast--for publicly traded securities in history. 
\2\ Retail investors can make their own investment decisions or seek 
the advice of a regulated investment professional through a broker-
dealer or investment adviser.
---------------------------------------------------------------------------
     \2\ See, e.g., ``A Century of Stock Market Liquidity and Trading 
Costs'', Charles M. Jones (May 23, 2002), available at https://
papers.ssrn.com/sol3/papers.cfm?abstract-id=313681; ``Equity Trading in 
the 21st Century'', James J. Angel, Lawrence E. Harris, and Chester S. 
Spatt, Quarterly Journal of Finance, Vol. 1, No. 1 (2011); and ``Equity 
Trading in the 21st Century: An Update'', James J. Angel, Lawrence E. 
Harris, and Chester S. Spatt (May 23, 2013), available at https://
www.q-group.org/wp-content/uploads/2014/01/Equity-Trading-in-the-21st-
Century-An-Update-FINAL.pdf.
---------------------------------------------------------------------------
    Retail investors can achieve low-cost diversification and 
professional management by indirectly investing in the stock market 
through passively--and actively--managed mutual funds and exchange-
traded funds (ETFs). Competition among funds has brought fees and 
expenses down to their lowest levels in history. \3\ The widespread 
availability of retirement savings accounts such as 401(k) plans and 
individual retirement accounts (IRAs) also allows low-cost access to 
the stock market.
---------------------------------------------------------------------------
     \3\ See, e.g., ``2020 Investment Company Fact Book: A Review of 
Trends and Activities in the Investment Company Industry'', available 
at https://www.ici.org/research/stats/factbook.
---------------------------------------------------------------------------
    Retail investors have taken advantage of these beneficial trends 
over the past few decades. The percentage of U.S. households that own 
stocks--directly or indirectly through funds and retirement savings 
accounts--increased from 32 percent in 1989 to 53 percent in 2019. \4\ 
Low-income households still lag high-income households in stock 
ownership rates, but low-income households saw the biggest gains over 
this period. \5\ \6\
---------------------------------------------------------------------------
     \4\ See ``Federal Reserve Board 2019 Survey of Consumer Finances'' 
(Nov. 17, 2020), available at https://www.federalreserve.gov/econres/
scfindex.htm.
     \5\ See ``Main Street Owns Wall Street, ICI Viewpoints'', Sarah 
Holden and Michael Bogdan (Feb. 10, 2021), available at https://
www.ici.org/viewpoints/21-view-equityownership.
     \6\ The Milken Institute Center for Financial Markets is actively 
engaged in research, programs, and events to provide for more equitable 
access to capital for job-creating businesses and more equitable access 
to investments by retail investors.
---------------------------------------------------------------------------
    However, the SEC could make regulatory changes to improve the 
retail investing landscape. The January trading frenzy and the related 
difficulties faced by some brokerage customers highlighted a few areas 
that require the SEC and this Committee's immediate attention.
    The Commission has already said that they are reviewing actions 
taken by regulated entities to determine whether they may have 
disadvantaged investors or otherwise unduly inhibited their ability to 
trade certain securities. \7\ The Commission also said that they are 
investigating whether abusive or manipulative trading activity 
prohibited by the Federal securities laws occurred during this episode. 
\8\
---------------------------------------------------------------------------
     \7\ Statement of Acting Chair Lee and Commissioners Peirce, 
Roisman, and Crenshaw Regarding Recent Market Volatility (Jan. 29, 
2021), available at https://www.sec.gov/news/public-statement/joint-
statement-market-volatility-2021-01-29.
     \8\ Id.
---------------------------------------------------------------------------
    I have complete confidence that the Commission and its staff will 
identify and pursue any evidence of noncompliance or wrongdoing. 
Accordingly, I focus my testimony on the market structure and market 
infrastructure \9\ issues that have been raised in the aftermath of the 
January trading. Before addressing specific issues, I summarize some 
guiding principles that I find useful in thinking through them.
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     \9\ The term ``market structure'' (or ``market microstructure'') 
generally refers to the operation and regulation of financial markets. 
The term ``market infrastructure'' (or ``market plumbing'') generally 
refers to the network of systems that facilitate financial market 
transactions, such as payment systems, clearance, and settlement.
---------------------------------------------------------------------------
Guiding Principles for Market Structure and Market Infrastructure 
        Policy
There Are No Solutions; There Are Only Trade-offs \10\
---------------------------------------------------------------------------
     \10\ This phrase is often attributed to Thomas Sowell.
---------------------------------------------------------------------------
    The regulatory framework of the U.S. equity markets is complicated; 
it reflects a complex system of legal and regulatory decisions that 
have been made over decades. The markets have evolved within this 
framework into a highly interconnected system.
    As a result, any change to market structure policy in one area will 
likely affect other areas. For example, if payment for order flow were 
restricted or banned, zero-commission trades would likely disappear. 
This is one tradeoff that the Commission will have to weigh when 
deciding whether and, if so, how to make any changes in existing 
regulation of payment for order flow arrangements. Changes to existing 
market structure and market infrastructure policy always involve 
tradeoffs.
Economic Analysis Is a Particularly Useful Tool
    The lens of economic analysis is well-suited for evaluating 
tradeoffs. While serving as an SEC commissioner, I found my economics 
training was a valuable tool on virtually every regulatory and 
enforcement decision I had to make.
    In 2012, the Commission recognized the importance of going beyond 
statutory obligations mere quantitative exercises to incorporate 
comprehensive economic analysis in the rulemaking process by adopting 
``Current Guidance on Economic Analysis in SEC Rulemaking'' (Current 
Guidance). \11\ The Guidance was adopted under SEC Chairman Mary 
Schapiro. It has been followed on a bipartisan basis by Chair Mary Jo 
White, myself as Acting Chairman, and Chairman Jay Clayton. \12\ I was 
glad to see that SEC-nominee Gary Gensler committed to following the 
Current Guidance in response to a question during last week's 
nomination hearing.
---------------------------------------------------------------------------
     \11\ ``Current Guidance on Economic Analysis in SEC Rulemaking'', 
(Mar. 16, 2012), available at http://www.sec.gov/divisions/riskfin/
rsfi-guidance-econ-analy-secrulemaking.pdf.
     \12\ The Commission has not proposed or adopted any new rules 
under current Acting Chair Allison Herren Lee.
---------------------------------------------------------------------------
    The SEC's Current Guidance requires the Commission to evaluate a 
rule's likely economic consequences, including potential negative 
unintended consequences. It requires the Commission to compare a 
proposed regulatory action with reasonable alternatives, including the 
alternative of not adopting a rule.
    Because U.S. equity markets and their regulatory framework are so 
complex, the SEC's Current Guidance is a particularly useful tool when 
evaluating any potential changes to market structure and market 
infrastructure policy.
Frequent Retrospective Reviews of Existing Rules Are Necessary
    The only constant in financial markets is change. Markets and 
technologies are continually evolving. If we want our capital markets 
to remain the envy of the world, our regulatory framework needs to 
evolve with them.
    Throughout my tenure as an SEC commissioner, I was an outspoken 
advocate of retrospective reviews of Commission rules. \13\ I believe 
it is a fundamental best practice of good government to observe how the 
Commission's regulations work in the real world. Armed with this 
information, the Commission can propose thoughtful improvements to its 
rules to advance the Commission's essential work to protect investors, 
maintain fair, orderly, and efficient markets, and promote capital 
formation.
---------------------------------------------------------------------------
     \13\ See, e.g., ``Advancing and Defending the SEC's Core 
Mission'', Speech by Commissioner Michael S. Piwowar at the U.S. 
Chamber of Commerce (Jan. 27, 2014), available at https://www.sec.gov/
news/speech/2014-spch012714msp; Remarks to the Securities Enforcement 
Forum 2014, Speech by Commissioner Michael S. Piwowar (Oct. 14, 2014), 
available at https://www.sec.gov/News/Speech/Detail/Speech/
1370543156675; Statement Regarding Publication of List of Rules to be 
Reviewed Pursuant to the Regulatory Flexibility Act, Public Statement 
by Commissioner Michael S. Piwowar (Sept. 15, 2016), available at 
https://www.sec.gov/news/statement/piwowar-statement-list-of-rules-
regulatory-flexibility-act.html; Remarks at FINRA and Columbia 
University Market Structure Conference, Speech by Commissioner Michael 
S. Piwowar (Oct. 26, 2017), available at https://www.sec.gov/news/
speech/speech-piwowar-2017-10-26; and Statement of Commissioner Piwowar 
at Open Meeting Regarding Amendments to the Commission's Whistleblower 
Program Rules, Commissioner Michael S. Piwowar (June 28, 2018), 
available at https://www.sec.gov/news/public-statement/statement-
piwowar-whistleblower-062818.
---------------------------------------------------------------------------
    I am not alone in this view. For example, the Regulatory 
Flexibility Act of 1980 requires agencies such as the Commission to 
perform a periodic review of rules that have or will have a significant 
economic impact upon a substantial number of small entities within ten 
years of the publication of such rules as final rules ``to determine 
whether such rules should be continued without change, or should be 
amended or rescinded.'' \14\ The Regulatory Flexibility Act identifies 
the following factors for analysis: (1) the continued need for the 
rule; (2) the nature of complaints or comments received concerning the 
rule from the public; (3) the complexity of the rule; (4) the extent to 
which the rule overlaps, duplicates, or conflicts with other Federal 
rules, and, to the extent feasible, with State and local governmental 
rules; and (5) the length of time since therule has been evaluated or 
the degree to which technology, economic conditions, or other factors 
have changed in the area affected by the rule. \15\
---------------------------------------------------------------------------
     \14\ 5 U.S.C. 610.
     \15\ 5 U.S.C. 610(b).
---------------------------------------------------------------------------
    In 2011, President Obama signed an Executive Order to enhance the 
Regulatory Flexibility Act's goals by directing independent agencies 
such as the SEC to develop and implement a plan to conduct ongoing 
retrospective analyses of existing rules. \16\ The stated goal is ``to 
determine whether any such regulations should be modified, streamlined, 
expanded, or repealed so as to make the agency's regulatory program 
more effective or less burdensome in achieving the regulatory 
objectives.'' \17\
---------------------------------------------------------------------------
     \16\ See Executive Order 13579--Regulation and Independent 
Regulatory Agencies (July 11, 2011), available at https://
obamawhitehouse.archives.gov/the-press-office/2011/07/11/executive-
order-13579-regulation-and-independent-regulatory-agencies. See also M-
11-28--Memorandum for the Heads of Independent Regulatory Agencies 
(July 22, 2011), available at https://obamawhitehouse.archives.gov/
sites/default/files/omb/memoranda/2011/m11-28.pdf.
     \17\ Id.
---------------------------------------------------------------------------
    Because markets and technologies are continually evolving, frequent 
retrospective reviews of market structure and market infrastructure 
rules by the Commission are necessary to ensure that they are not 
outdated, obsolete, or overly burdensome.
Specific Issues
The Trade Settlement Cycle
    When a retail (or institutional) customer buys or sells a security 
through a broker, the broker routes the order to a trading venue for 
execution and then submits the resulting trade to the Depository Trust 
and Clearing Corporation (DTCC) for clearance and settlement. In the 
United States, most securities transactions take two days (T+2) to 
settle. To mitigate the market, liquidity, counterparty, and systemic 
risks associated with the delay in settlement, DTCC requires brokers to 
post margin using their own funds.
    On January 28, 2021, Robinhood received a notice from DTCC that 
Robinhood owed a net deposit of approximately $3 billion. \18\ After 
discussions with Robinhood staff in which Robinhood notified DTCC that 
it would impose trading restrictions in GameStop and other securities, 
DTCC reduced the net deposit to approximately $1.4 billion. \19\ To put 
that number in context, it represented nearly ten times the amount 
required just three days earlier. \20\
---------------------------------------------------------------------------
     \18\ See Testimony of Vladimir Tenev Robinhood Markets, Inc., 
``Game Stopped? Who Wins and Loses When Short Sellers, Social Media, 
and Retail Investors Collide'', Hearing before the U.S. House Financial 
Services Committee (Feb. 18, 2021), available at https://
financialservices.house.gov/calendar/eventsingle.aspx?EventID=407107.
     \19\ Id.
     \20\ Id.
---------------------------------------------------------------------------
    This incident has caused many investors to ask important questions. 
Why does the transfer of ownership for most securities transactions in 
the U.S. occur two business days after the trade date? Why haven't we 
already moved to T+1 or T+0? I believe I am in a unique position to 
answer those questions. That is why I published an op-ed in The Wall 
Street Journal last month. \21\
---------------------------------------------------------------------------
     \21\ See ``It's T-0 to Go Faster Than T+2'', The Wall Street 
Journal, Opinion/Commentary, Michael S. Piwowar (Online Version--Feb. 
24, 2021, Print Version--Feb. 25, 2021), available at https://
www.wsj.com/articles/its-t-0-to-go-faster-than-t-2-11614207705.
---------------------------------------------------------------------------
    As Acting Chairman of the SEC, I led the effort in 2017 to move 
officially from T+3 to T+2. \22\ At that time, T+2 was the best option 
based on economic analysis. The financial system was not yet prepared 
in 2017 to move to T+1, but it was ready to take a good first step 
toward greater efficiency and timeliness.
---------------------------------------------------------------------------
     \22\ See ``SEC Adopts T+2 Settlement Cycle for Securities 
Transactions'', Press Release (Mar. 22, 2017), available at https://
www.sec.gov/news/press-release/2017-68-0. See also ``Statement at Open 
Meeting Regarding Amendment to Shorten the Trade Settlement Cycle'', 
Public Statement, Acting Chairman Michael S. Piwowar (Mar. 22, 2017), 
available at https://www.sec.gov/news/public-statement/piwowar-open-
meeting-032217.
---------------------------------------------------------------------------
    The change to T+2 was a success. Retail investors benefitted from 
quicker access to cash and securities when their trades were executed. 
The change reduced the dangers from market, liquidity, counterparty, 
and systemic risks across the financial system.
    Recognizing that eventually moving to T+1 could have similar 
benefits, the Commission directed the staff in the final rule to 
undertake to submit a report to the Commission by September 2020. \23\ 
The specific language in the final rule stated:
---------------------------------------------------------------------------
     \23\ See ``Securities Transaction Settlement Cycle'', Final Rule, 
SEC Release No. 34-80295 (Mar. 22, 2017), 82 FR 15564 Mar. 29, 2017), 
available at https://www.sec.gov/rules/final/2017/34-80295.pdf.
---------------------------------------------------------------------------
      ``This report will include, but not be limited to an examination 
of:

        (i) the impact of today's amendment to Rule 15c6-1(a) to 
establish a T+2 standard settlement cycle on market participants, 
including investors;

        (ii) the potential impacts associated with movement to a 
shorter settlement cycle beyond T+2;

        (iii) the identification of technological and operational 
improvements that can be used to facilitate a movement to a shorter 
settlement cycle; and

        (iv) cross-market impacts (including international 
developments) related to the shortening of the settlement cycle to 
T+2.'' \24\
---------------------------------------------------------------------------
     \24\ Id.
---------------------------------------------------------------------------
Recommendations for the Trade Settlement Cycle
    As I recommend in my op-ed, the SEC should release the staff report 
and open a comment file on its website for public feedback. The SEC 
should hold a public forum to discuss lessons learned from the recent 
events so that we all have the benefit of the most up-to-date 
information.
    But, the SEC cannot move beyond T+2 on its own. Bank regulators 
will need to be involved because shortening the length of time between 
when a trade is executed and when securities and cash are delivered to 
the buyer and seller, respectively, will require improvements in the 
speed of bank payment systems. \25\ \26\
---------------------------------------------------------------------------
     \25\ See, e.g., ``We Shouldn't Have To Wait for FedNow To Have 
Faster Payments'', American Banker--BankThink, George Selgin and Aaron 
Klein (Feb. 28, 2020), available at https://www.americanbanker.com/
opinion/we-shouldnt-have-to-wait-for-fednow-to-have-faster-payments.
     \26\ In addition, regulators will need to carefully coordinate the 
foreign exchange (FX) settlement cycle for market participants who rely 
on FX settlements to fund cross-border securities transactions.
---------------------------------------------------------------------------
    Accordingly, the Treasury Secretary should convene a principals 
meeting of the Financial Stability Oversight Council, the Federal 
financial regulators' coordinating body, and initiate a securities 
settlement workstream. The purpose of the workstream is to coordinate 
regulatory efforts related to whether and how to shorten the settlement 
cycle.
Payment for Order Flow
    The SEC allows brokers to have a choice of which trading venue to 
direct their customers' orders. The broker may direct the order to the 
exchange where the stock is listed, a different exchange or alternative 
trading system, or a market maker.
    The SEC also allows brokers to enter into payment for order flow 
arrangements. Market makers may pay brokers for routing orders to them 
so long as they fulfill their best execution obligations. A broker must 
consider multiple factors when seeking best execution of customers' 
orders, including the opportunity to get a better price than what is 
currently quoted (price improvement), the speed of execution, and the 
likelihood that the trade will be executed. \27\
---------------------------------------------------------------------------
     \27\ See ``Fast Answers--Best Execution'', (May 9, 2011), 
available at https://www.sec.gov/fast-answers/answersbestexhtm.html.
---------------------------------------------------------------------------
    Payment for order flow arrangements could represent a conflict of 
interest between their broker and their customer. Brokers may choose to 
route customer orders to the market maker that offers the highest 
payment to the broker rather than to the trading venue that offers the 
best execution for the customer. However, the SEC's best execution 
requirements mitigate this conflict of interest. The SEC and FINRA 
regularly conduct examinations of broker-dealers for compliance with 
best execution obligations and bring enforcement actions when they find 
violations. \28\
---------------------------------------------------------------------------
     \28\ See, e.g., ``FINRA Fines Robinhood Financial, LLC $1.25 
Million for Best Execution Violations'', News Release (December 19, 
2019), available at https://www.finra.org/media-center/newsreleases/
2019/finra-fines-robinhood-financial-llc-125-million-best-execution, 
and ``SEC Charges Robinhood Financial With Misleading Customers About 
Revenue Sources and Failing to Satisfy Duty of Best Execution'', Press 
Release (Dec. 17, 2020), available at https://www.sec.gov/news/press-
release/2020-321.
---------------------------------------------------------------------------
    Were Robinhood customers who traded GameStop stock in January 2021 
advantaged or disadvantaged by Robinhood's payment for order flow 
arrangements?
    Currently available public information does not allow for a direct 
analysis of the execution quality that specific Robinhood customers 
received on their GameStop orders in January 2021. However, analysis of 
two SEC-required disclosures can shed some light on the issue of 
whether retail investors, on average, across all brokers, received 
price improvement on their GameStop orders in January 2021.
    SEC Rule 606 under Regulation NMS requires broker-dealers to 
provide quarterly disclosures of information regarding the handling of 
their customers' orders. \29\ Using Robinhood's Rule 606 report for the 
fourth quarter of 2020, I determined that the three venues where 
Robinhood routed most of its orders were Citadel Execution Services, G1 
Execution Services, and Two Sigma Securities. Robinhood discloses on 
its Rule 606 report that it receives payment from these venues to 
direct equity order flow.
---------------------------------------------------------------------------
     \29\ Securities Exchange Act Release No. 51808 (June 9, 2005), 70 
FR 37496 (June 29, 2005).
---------------------------------------------------------------------------
    SEC Rule 605 under Regulation NMS requires market centers that 
trade NMS stocks to make available to the public monthly electronic 
execution reports that include uniform execution quality measures. \30\ 
Market centers report these measures separately for each stock, but 
those measures are aggregated across all broker-dealers who route to 
them. Using the Rule 605 reports for January 2021 of each of the three 
venues above, I calculated their execution quality statistics for their 
order executions of GameStop stock. See Table 1 below.
---------------------------------------------------------------------------
     \30\ Id.
    
    
    I calculated the total dollar amount of orders in GameStop stock 
executed inside the quote and outside the quote for each venue. For all 
three venues, the dollar amount of orders executed inside the quote 
(receiving price improvement) exceeded the dollar amount of orders 
executed outside the quote (receiving price disimprovement), resulting 
in net price improvement, in aggregate, for GameStop stock orders 
routed to them in January 2021. The average price improvement ranged 
from $0.03 to $0.06 per share.
Recommendations for Payment for Order Flow
    The SEC Division of Examinations should expand its ongoing 
initiative in the area of payment for order flow. \31\ The Division 
should focus its efforts on order routing and best execution 
obligations in a zero-commission environment.
---------------------------------------------------------------------------
     \31\ U.S. Securities and Exchange Commission 2021 National 
Examination Priorities, Division of Examinations, available at https://
www.sec.gov/files/2021-exam-priorities.pdf.
---------------------------------------------------------------------------
    The Commission should hold a roundtable to discuss payment for 
order flow. The event would provide a public forum for in-depth 
discussions of how payment for order flow is working in a zero-
commission environment.
    The Commission should consider amending Rule 605 and Rule 606 of 
Regulation NMS to provide better public transparency of execution 
quality measures. For example, the Commission should consider requiring 
each broker to report execution quality measures for every stock they 
route to every market center quarterly (or monthly).
Short-Selling and Securities Lending
    Some have attributed at least part of the large influx of buy 
orders that pushed up the stock price to a short squeeze, causing 
short-sellers to buy additional shares to cover their short positions. 
The episode has created a lot of interest in the effects that short-
sellers have on the market.
    It is important to remember that abusive short-selling--sales to 
manipulate a stock price--is already illegal. The SEC has promulgated 
rules to prohibit abusive short-selling practices and regularly 
enforces those rules. \32\ As a result, the vast majority of short 
sales that occur in the United States are legal. \33\
---------------------------------------------------------------------------
     \32\ See ``Short Sales (Regulation SHO)'', Final Rule, SEC Release 
No. 34-50103 (Jul 28, 2004), 69 FR 48008 (Aug. 6, 2004), available at 
https://www.sec.gov/rules/final/34-50103.htm.
     \33\ See, e.g., ``Key Points About Regulation SHO'', SEC Office of 
Investor Education and Advocacy publication (Apr. 8, 2015), available 
at https://www.sec.gov/investor/pubs/regsho.htm.
---------------------------------------------------------------------------
    Academic research shows that short-selling generally has a positive 
effect on market quality. According to a recent study, ``most empirical 
papers report that during periods of regular trading activity, short-
selling has a positive influence on liquidity, price discovery and 
price efficiency, thus supporting the idea that short-selling is 
crucial to maintain the orderly functioning of markets.'' \34\ \35\ 
Also, ``the existing evidence short-selling cannot be blamed for having 
triggered downward price reversal during the 2008 financial crisis.'' 
\36\ Short-sellers also protect other investors by detecting and 
publicizing fraud. \37\
---------------------------------------------------------------------------
     \34\ Stefano Alderighi and Pedro Gurrola Perez, ``What Does 
Academic Research Say about Short-Selling Bans?'' WFE Research Working 
Paper (Apr. 29, 2020), available at https://ssrn.com/abstract=3775704.
     \35\ The same study shows that academic research finds that short-
selling bans disrupt the orderly functioning of markets. Their negative 
effects include reducing liquidity, increasing price inefficiency, and 
hampering price discovery.
     \36\ Id.
     \37\ See, e.g., Testimony of Owen A. Lamont, ``Hedge Funds and 
Independent Analysts: How Independent Are Their Relationships?'' 
Hearing before the U.S. Senate Committee on the Judiciary (Jun. 28, 
2006), available at https://www.govinfo.gov/content/pkg/CHRG-
109shrg31059/html/CHRG-109shrg31059.htm. Regulation SHO provides 
limited exceptions for market makers when fulfilling their market maker 
obligations.
---------------------------------------------------------------------------
    Regulation SHO requires a broker-dealer to have reasonable grounds 
to believe that the security can be borrowed so that it can be 
delivered on the date delivery is due before effecting a short sale 
order in any equity security. \38\ However, it has been widely reported 
that approximately 140 percent of GameStop's stock had been sold short. 
At least part of this disparity can be attributed to a lack of 
transparency in securities lending.
---------------------------------------------------------------------------
     \38\ See, e.g., ``Key Points About Regulation SHO'', SEC Office of 
Investor Education and Advocacy publication (Apr. 8, 2015), available 
at https://www.sec.gov/investor/pubs/regsho.htm.
---------------------------------------------------------------------------
    Recall the massive U.S. Government bailout of the creditors of the 
insurance giant American International Group, Inc. (AIG). AIG's failure 
was mainly due to its credit default swaps portfolio and its securities 
lending program, not its insurance business. AIG's credit default swap 
and securities lending counterparties received much of the Government 
bailout. \39\ Title VII of the Dodd-Frank Act \40\ established a 
regulatory framework for swaps (and securities-based swaps), and the 
SEC and CFTC have promulgated regulations under the statute. Section 
984 of Dodd-Frank required the SEC to ``promulgate rules that are 
designed to increase the transparency of information available to 
brokers, dealers, and investors, with respect to the loan or borrowing 
of securities.'' \41\
---------------------------------------------------------------------------
     \39\ See, e.g., Congressional Oversight Panel, June Oversight 
Report, ``The AIG Rescue and Its Impact on Markets, and the Government 
Exit Strategy'' (June 10, 2010); Louise Story and Gretchen Morgenson, 
In ``U.S. Bailout of AIG, Forgiveness for Big Banks'', New York Times 
(June 29, 2010); William Greider, ``The AIG Bailout Scandal'', The 
Nation (Aug. 6, 2010); Scott E. Harrington, ``The Financial Crisis, 
Systemic Risk, and the Future of Insurance Regulation'' (Sept. 2009).
     \40\ Dodd-Frank Wall Street Reform and Consumer Protection Act, 
Pub. L. No. 111-203 (2010).
     \41\ Dodd-Frank Wall Street Reform and Consumer Protection Act, 
984(b), Pub. L. No. 111-203 (2010).
---------------------------------------------------------------------------
    To date, the SEC has finalized only one rule that could be 
characterized as being responsive to Dodd-Frank Section 984. To 
increase the comparability of securities lending fees between open-end 
funds, the Commission adopted amendments to fund registration 
statements. The amendments required disclosures relating to fund 
securities lending activities, including income and fees from 
securities lending and the fees paid to securities lending agents in 
the prior fiscal year. \42\ These amendments were a good start, but the 
SEC should further improve the transparency of securities lending.
---------------------------------------------------------------------------
     \42\ See, ``SEC Adopts Rules To Modernize Information Reported by 
Funds, Require Liquidity Risk Management Programs, and Permit Swing 
Pricing'', Press Release (Oct. 13, 2016), available at https://
www.sec.gov/news/pressrelease/2016-215.html.
---------------------------------------------------------------------------
Recommendations for Short-Selling and Securities Lending
    The SEC should hold a public forum and open a request for comment 
on the transparency of securities lending. In evaluating various 
transparency alternatives, the SEC should distinguish between 
``regulatory reporting'' and ``public transparency.'' Regulatory 
reporting refers to the information available to the SEC to perform its 
regulatory functions. Public transparency refers to the information 
that the SEC makes available to market participants, investors, and 
academic researchers.
    Then, the SEC should use economic analysis to determine whether 
and, if so, how to increase regulatory reporting in securities lending. 
The SEC should conduct a separate economic analysis to determine how 
much, if any, new information should be provided to the public.
Accredited Investor Definition
    As mentioned above, low-income households have lower rates of 
ownership of public companies than high-income households. In 2019, 15 
percent of households in the lowest income quintile held stocks in 
public companies--directly or indirectly through funds and retirement 
savings accounts--compared to 88 percent of households in the highest 
income quintile. \43\ While I am not aware of any statistics on 
ownership rates by household income level for private companies, the 
gap is undoubtedly worse. SEC rules effectively prohibit low-income 
investors from investing in this high-growth sector of the economy.
---------------------------------------------------------------------------
     \43\ See ``Main Street Owns Wall Street'', ICI Viewpoints, Sarah 
Holden and Michael Bogdan (Feb. 10, 2021), available at https://
www.ici.org/viewpoints/21-view-equityownership.
---------------------------------------------------------------------------
    The SEC's accredited investor definition essentially divides the 
world of private company investors into two arbitrary categories of 
individuals--those persons who are accorded the privileged status of 
being an accredited investor and those who are not. \44\ In short, if 
you make $200,000 or more in annual income or have $1 million or more 
in net worth, then you are in the privileged class and could choose to 
invest in the full panoply of investments, whether public or private. 
\45\ If not, the SEC has decided that, for your protection, you are 
restricted access to invest in private companies.
---------------------------------------------------------------------------
     \44\ See, e.g., Remarks at the Meeting of the SEC Advisory 
Committee on Small and Emerging Companies, Public Statement by 
Commissioner Michael S. Piwowar (May 18, 2016), available at https://
www.sec.gov/news/statement/piwowar-opening-remarks-acsec-
051816html.html; Remarks at the ``SEC Speaks'' Conference 2017: 
``Remembering the Forgotten Investor'', Speech by Acting Chairman 
Michael S. Piwowar (Feb. 24, 2017), available at https://www.sec.gov/
news/speech/piwowar-remembering-the-forgotten-investor.html.
     \45\ The SEC recently expanded the definition of accredited 
investor to include, among other things, individuals ``holding in good 
standing one or more professional certifications or designations or 
other credentials from an accredited educational institution that the 
Commission has designated as qualifying an individual for accredited 
investor status[.]'' See ``Accredited Investor Definition'', Final 
Rule, SEC Release Nos. 33-10824; 34-89669 (Aug. 26, 2021), 85 FR 64234 
(Oct. 9, 2020), available at https://www.sec.gov/rules/final/2020/33-
10824.pdf. However, the expanded definition is not likely to 
substantially increase the number of low-income individuals who qualify 
under the new definition.
---------------------------------------------------------------------------
    As an SEC commissioner, I took my investor protection mandate 
extremely seriously. However, I challenge the SEC's investor protection 
rationale for prohibiting nonaccredited investors from investing in 
high-risk companies. Here, I appeal to two well-known concepts from the 
field of financial economics. The first is the risk-return tradeoff. 
Because most investors are risk averse, riskier securities must offer 
investors higher expected returns. As a result, prohibiting non-
accredited investors from investing in high-risk securities is the same 
thing as prohibiting them from investing in high-expected-return 
securities.
    The second economic concept is modern portfolio theory. By holding 
a diversified portfolio of securities, investors reap the benefits of 
diversification; that is, the risk of the portfolio as a whole is lower 
than the risk of any individual securities. The statistical correlation 
of returns is key. When adding higher-risk, higher-return securities to 
an existing portfolio, as long as the new securities' returns are not 
perfectly positively correlated with (move in exactly the same 
direction as) the existing portfolio, investors can reap higher 
portfolio returns with little or no change in overall portfolio risk. 
In fact, if the correlations are low enough, the overall portfolio risk 
could actually decrease.
    These two concepts show how even a well-intentioned investor 
protection policy can ultimately harm the very investors the policy is 
intended to protect. Moreover, restricting the number of accredited 
investors in the privileged class can have additional adverse impacts. 
The accredited investors may enjoy even higher returns because the 
nonaccredited investors are prohibited from buying and bidding up the 
price of high-risk, high-expected-return securities. Remarkably, by 
allowing only high-income and high-net-worth individuals to reap the 
risk and return benefits from investing in certain securities, the SEC 
is actually exacerbating wealth inequality. \46\ \47\
---------------------------------------------------------------------------
     \46\ See Thomas Piketty, ``Capital in the Twenty-First Century'', 
translated by Arthur Goldhammer (Cambridge MA: The Belknap Press of 
Harvard University Press, 2014).
     \47\ Another unfortunate consequence of the accredited investor 
definition is that small businesses face higher costs of capital.
---------------------------------------------------------------------------
Recommendation for the Accredited Investor Definition
    The SEC should revisit the accredited investor definition and 
solicit public feedback on achieving more equitable access to investing 
in private companies across all income levels. Based on that feedback, 
the SEC should engage in rulemaking to open up these investment 
opportunities to all Americans.
The Role of the Senate Banking Committee
    Throughout my testimony, I have made several recommendations for 
the SEC. This Committee, through its oversight role, has the 
opportunity to influence the SEC's agenda toward improving the current 
state of retail investing. If this Committee believes that the SEC's 
market structure and market infrastructure rules should keep pace with 
changes in markets and technologies, ``deep-dive'' hearings on specific 
issues--both SEC oversight hearings and hearings with subject matter 
expertise--would be helpful.
    If this Committee believes legislation would be necessary to 
improve a particular market structure or market infrastructure policy, 
I urge caution in legislating prescriptive standards. For the reasons 
stated above, the SEC is in the best position to promulgate rules based 
on the current environment and update those rules as needed in response 
to changes in the markets and technologies.
    Thank you for bringing attention to these critical issues and for 
the opportunity to testify here today. I am happy to answer any 
questions you may have.
                                 ______
                                 
                PREPARED STATEMENT OF ANDREW N. VOLLMER
 Senior Affiliated Scholar, Mercatus Center at George Mason University
                             March 9, 2021
    Chairman Brown, Ranking Member Toomey, and Members of the 
Committee: I am pleased to have an opportunity to comment on several 
timely and important issues related to the Federal securities laws. I 
have extensive experience with those laws. I was Deputy General Counsel 
of the Securities and Exchange Commission from mid-2006 to March 2009 
and taught courses on securities regulation at the University of 
Virginia School of Law from 2014 to 2019. For many years, I was a 
partner in the securities enforcement practice of Wilmer Cutler 
Pickering Hale and Dorr LLP and am currently a senior affiliated 
scholar with the Mercatus Center at George Mason University.
    My testimony will address (1) the recent trading activity in the 
common stock of GameStop Corp. and a few other companies, (2) 
securities trading platforms such as Robinhood Financial, and (3) 
considerations for further action. My conclusion is that the 
information currently available has not revealed a problem of 
sufficient severity to justify Congress imposing new regulations in 
these areas.
    New information could change that, but, in any deliberations about 
possible additional legal restrictions, Congress should give weight to 
and respect the personal liberty interests involved.
Gamestop
    The rapid increase and decrease in the price of the common stock of 
GameStop and a few other companies has received a great deal of 
attention. My information about the events during the past several 
weeks is from publicly available sources, and my understanding is that 
various investigations into the details are being conducted. My views 
are based on the public information, but new information and details 
from the investigations could affect my opinions. I am open to 
persuasion from new facts.
    Based on the information I have seen, misconduct probably did not 
occur in the recent trading of GameStop. Some concerns about a pump-
and-dump scheme or a manipulation have been raised, but the public 
information does not bear those fears out. In the standard type of 
pump-and-dump scheme, one or more persons make material false or 
misleading statements to the market to drive a stock price up or down. 
The SEC is investigating, but my understanding is that the main group 
of individuals trading GameStop, those using the Reddit WallStreetBets 
social media forum, did not make material false or misleading 
statements and were not deceived by others.
    For securities manipulation, a person needs to create a false 
impression of buying or selling activity. The Supreme Court has said 
that manipulation is ``virtually a term of art when used in connection 
with the securities markets.'' \1\ Manipulation ``refers generally to 
practices, such as wash sales, matched orders, or rigged prices, that 
are intended to mislead investors by artificially affecting market 
activity.'' \2\ Some important legal authorities have taken broader 
approaches, \3\ but the essence of a manipulation is buying or selling 
activity that is not legitimate or genuine.
---------------------------------------------------------------------------
     \1\ Ernst & Ernst v. Hochfelder, 425 U.S. 185, 199 (1976).
     \2\ Sante Fe Indus., Inc. v. Green, 430 U.S. 462, 476-77 (1977); 
see also Schreiber v. Burlington Northern, Inc., 472 U.S. 1, 6 (1985).
     \3\ See, e.g., Markowski v. SEC, 274 F.3d 525 (D.C. Cir. 2001).
---------------------------------------------------------------------------
    The traders using the WallStreetBets site actually bought GameStop 
and the other stocks. If a person bears market risk, that is, a non-
trivial risk that the buyer or seller will make or lose money on the 
transaction, then the person did not engage in artificial trading even 
if he or she had evil intent. In addition, when a person actually buys 
stock, it is very hard to tell the difference between evil intent to 
manipulate the stock price up and a person's desire for the stock price 
to go up naturally.
    The effects of the GameStop trading on the larger secondary market 
for securities do not, at the moment, appear to be widespread or 
severe. The trading activity in GameStop, AMC, and Blackberry was 
limited to a few companies and was short term. Some investors made 
money in GameStop and some lost money. Short sellers of GameStop might 
have a legitimate complaint about the WallStreetBets buyers, and the 
short sale rules in the securities laws could be reviewed, but those 
rules were not the major cause of the price increases. The sharp rise 
and fall in the price of GameStop did not have apparent effects on 
broader market gauges. \4\ Even if an index fund or an exchange traded 
fund owned GameStop, that holding was only one name in a diversified 
portfolio, and the price of GameStop stock began to correct itself 
within a short time with no significant damage to the pricing or 
liquidity in the more general market for listed equities.
---------------------------------------------------------------------------
     \4\ Anneken Tappe, U.S. stocks post their worst month since 
October as the GameStop frenzy rages, CNN Business (Jan. 29, 2021) 
(reporting that, in January 2021, the month of the GameStop increase, 
the Dow and the broader S&P 500 had their worst month since October), 
https://www.cnn.com/2021/01/29/investing/dow-gamestop-stock-market-
today/index.html. Data from Google Finance show that GameStop went up 
1784 percent in January 2021 while the S&P 500 index went up 0.4 
percent and the Russell 2000 index, which included GameStop at the 
time, went up 6.6 percent.
---------------------------------------------------------------------------
    I do not want to sound like I encourage the behavior of the 
WallStreetBets traders. I do not. The actions of the GameStop buyers 
were not consistent with the purpose of the Federal securities markets. 
The purpose of the securities markets is to allow companies with good 
ideas to raise capital and to let millions of investors buy and sell 
existing shares based on their assessment whether companies have good 
commercial ideas or not.
    My understanding is that the WallStreetBets crowd was engaged in 
group behavior that was in part to stymie some short sellers, in part 
to identify with the other members of the group, and in part to have 
some entertainment. Most were not buying and selling GameStop based on 
an assessment of the likelihood of profit at the company (although some 
were), but those buying without analysis of the fundamental value of 
the retailer knew what they were doing, were not misled, and knew they 
could lose money. As discussed below, the events surrounding GameStop 
do not appear to require new securities restrictions or regulation.
Robinhood
    The broker-dealer Robinhood has come under scrutiny because many of 
the WallStreetBets traders use it and because it has certain features 
that encourage buying and selling securities. Those features include 
commission free trades, accounts with no minimum dollar amounts, the 
availability of option trading and fractional shares of stock, and an 
ability to buy and sell securities on an attractive, easy-touse 
internet site. Some have called the Robinhood mobile app the 
``gamification'' of securities trading.
    The criticisms of Robinhood fail to give appropriate weight to the 
benefits of its business model. The Robinhood brokerage service is 
innovative and makes significant positive contributions to society and 
the economy. It reduces costs for consumers, makes securities trading 
simpler and easier, increases consumer choice, and lowers barriers to 
participation in the market for the common stock of companies listed on 
stock exchanges. It therefore opens the securities markets and equity 
securities ownership to a much larger part of the population and to 
people with less income and wealth than those who are typically 
associated with participation in the equity markets.
    Expanding access to the equity securities markets for many new 
retail investors is especially notable. It is directly responsive to 
the concern that direct ownership of corporate stocks by individuals 
has declined since World War II. \5\ It is also directly responsive to 
the desire to make exchange-listed securities more accessible to lower 
income people and to give them more opportunities to increase wealth. 
\6\
---------------------------------------------------------------------------
     \5\ Kristian Rydqvist et al., Government policy and ownership of 
equity securities, 111 J. Fin. Eco. 70, 71 (2014) (``Since World War 
II, household direct equity ownership has declined precipitously. In 
the United States, just after the war, households directly own 90 
percent of the stock market; by 2010, this figure has come down to 
below 30 percent.'').
     \6\ The United States has made progress increasing household 
ownership of securities when both direct ownership and indirect 
ownership are considered. Indirect ownership means ownership of 
corporate equities through mutual funds or retirement plans. The 
percent of U.S. households owning stock directly and indirectly grew 
from approximately 32 percent in 1989 to 53 percent in 2019. When 
indirect ownership is taken into account, all income groups from the 
lowest to the highest quintile of family income increased stock 
ownership. This information is from a report of the Investment Company 
Institute that summarized the Federal Reserve Board's 2019 Survey of 
Consumer Finances. See Sarah Holden & Michael Bogdan, ``Main Street 
Owns Wall Street, ICI Viewpoints'' (Feb. 10, 2021), https://
www.ici.org/pdf/21-view-equityownership-print.pdf.
---------------------------------------------------------------------------
    Robinhood therefore increases consumer welfare and achieves 
important objectives of the U.S. economic and financial system. All of 
this is commendable and should not be faulted.
    Another question about Robinhood was the decision to restrict the 
ability of its customers to buy GameStop and other securities for a 
short period of time. In his testimony before the House Financial 
Services Committee on February 18, 2021, the head of Robinhood 
explained the circumstances leading to the restrictions. Robinhood 
received an unexpected call for a large amount of collateral from a 
financial institution that is the clearinghouse for the trades of 
Robinhood customers. The restriction on the purchases of GameStop was 
part of the response because Robinhood was not able immediately to 
provide the requested collateral. Robinhood explained that it did not 
restrict customers because of a desire to help short sellers or its 
main wholesale broker.
Considerations for Further Action
    The events surrounding the changes in prices for GameStop and the 
questions about the Robinhood trading platform have so far not revealed 
the kind of problem that would justify new legal restrictions or 
regulations. New regulation would be appropriate if data and evidence 
emerge to show a severe, sustained, recurring harm to investors that a 
law could prevent or reduce. We have not seen such a harm yet, but the 
more detailed investigations being undertaken could produce evidence of 
misconduct or reasons to reconsider the need for new regulation.
    Congress and the SEC should not impose new regulations lightly. An 
important consideration should be that government rules typically 
restrict personal freedom. The GameStop traders might not have been 
analyzing the fundamental financial position of GameStop within the 
traditions of the capital markets, but they were exercising their 
individual civil liberty. A founding principle and continuing 
aspiration of the country has been to preserve personal freedom, extend 
it when it has been denied, and use government regulation only when a 
serious and widespread harm is recurring. If regulation is justified, 
it should be narrow and go no further than necessary to correct the 
harm.
        RESPONSES TO WRITTEN QUESTIONS OF SENATOR SINEMA
                    FROM MICHAEL S. PIWOWAR

Q.1. Federal regulations tend to privilege institutional 
investors because of the presumption that they are more 
sophisticated. Given recent events, does it still make sense to 
treat institutional investors and retail investors differently 
when it comes to accessing certain types of offerings?
    Should we be assuming that institutional investors always 
make better investments than retail investors?

A.1. As I mentioned in my written testimony, U.S. Securities 
and Exchange Commission (SEC) rules effectively prohibit low-
income, low-net-worth investors from investing in high-growth 
companies.
    The SEC's accredited investor definition essentially 
divides the world of private company investors into two 
arbitrary categories of individuals--those persons who are 
accorded the privileged status of being an accredited investor 
and those who are not. In short, if you make $200,000 or more 
in annual income or have $1 million or more in net worth, then 
you are in the privileged class and could choose to invest in 
the full panoply of investments, whether public or private. If 
not, the SEC has decided that, for your protection, you are 
restricted access to invest in private companies.
    As an SEC commissioner, I took my investor protection 
mandate extremely seriously. However, I challenge the SEC's 
investor protection rationale for prohibiting nonaccredited 
investors from investing in high-risk companies. Here, I appeal 
to two well-known concepts from the field of financial 
economics. The first is the risk-return tradeoff. Because most 
investors are risk averse, riskier securities must offer 
investors higher expected returns. As a result, prohibiting 
non-accredited investors from investing in high-risk securities 
is the same thing as prohibiting them from investing in high-
expected-return securities.
    The second economic concept is modern portfolio theory. By 
holding a diversified portfolio of securities, investors reap 
the benefits of diversification; that is, the risk of the 
portfolio as a whole is lower than the risk of any individual 
securities. The statistical correlation of returns is key. When 
adding higher-risk, higher-return securities to an existing 
portfolio, as long as the new securities' returns are not 
perfectly positively correlated with (move in exactly the same 
direction as) the existing portfolio, investors can reap higher 
portfolio returns with little or no change in overall portfolio 
risk. In fact, if the correlations are low enough, the overall 
portfolio risk could actually decrease.
    These two concepts show how even a well-intentioned 
investor protection policy can ultimately harm the very 
investors the policy is intended to protect. Moreover, 
restricting the number of accredited investors in the 
privileged class can have additional adverse impacts. The 
accredited investors may enjoy even higher returns because the 
non-accredited investors are prohibited from buying and bidding 
up the price of high-risk, high-expected-return securities. 
Remarkably, by allowing only high-income and high-net-worth 
individuals to reap the risk and return benefits from investing 
in certain securities, the SEC is actually exacerbating wealth 
inequality.
    The SEC should revisit the accredited investor definition 
and solicit public feedback on achieving more equitable access 
to investing in private companies across all income levels. 
Based on that feedback, the SEC should engage in rulemaking to 
open up these investment opportunities to all Americans.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR CRAPO
                    FROM MICHAEL S. PIWOWAR

Q.1. A Financial Transaction Tax (FIT) would impact all 
Americans regardless of income through their retirement funds, 
529 college savings plans and ABLE plans for disabled 
dependents. With the investments of such a large portion of 
Americans across the income spectrum impacted, the effect of an 
FTT would ultimately make markets less efficient by reducing 
market volumes and decreasing the level of liquidity in the 
system. What kinds of regulatory measures and systemic 
safeguards must be in place to counteract the negative impacts 
of an FTT?

A.1. Imposing a financial transaction tax (FTT) in the United 
Sates would result in many negative effects, including 
unnecessarily hurting the global competitiveness of U.S. 
capital markets.
    In 2009, when I was a senior economist at the President's 
Council of Economic Advisers, I was asked to conduct research 
and prepare a memo for President Obama's top economic policy 
advisors on the potential effects of a financial transaction 
tax. My research showed that, without exception, every time an 
FTT was introduced in another jurisdiction, it resulted in 
disastrous consequences. My research yielded three key points:
    1. FTTs hurt market quality. Several empirical studies 
showed that the imposition of FTTs results in higher 
volatility, lower liquidity, and lower trading volume. \1\ As a 
result, FTTs have negative effects on price discovery and lead 
to a reduction in the information efficiency of markets. \2\
---------------------------------------------------------------------------
     \1\ See, e.g., ``Securities Transaction Taxes and Financial 
Markets'', Karl Habermeier and Andrei Kirilenko, IMF Working Paper 01-
51 (2001) available at http://www.imf.org/external/pubs/ft/wp/2001/
wp0151.pdf; and ``Transaction Taxes and the Behavior of the Swedish 
Stock Market', Steven R. Umlauf, Journal of Financial Economics, Vol 
33, No. 2 (1993).
     \2\ Id.
---------------------------------------------------------------------------
    2. Jurisdictions that do not impose an FTT win at the 
expense of jurisdictions that do. For example, when the Sweden 
imposed an FTT in the 1980s, a significant amount of trading 
volume simply move to the London stock market. \3\ Keep in mind 
that this occurred 40 years ago when it was much more difficult 
and costly to divert trading activity across borders. A similar 
tax today would result in immediate and devastating results.
---------------------------------------------------------------------------
     \3\ See, e.g., Umlauf (1993).
---------------------------------------------------------------------------
    3. FTTs never raise the expected revenue. Because trading 
volume declines (and moves to other jurisdictions) when FTTs 
are imposed, actual FTT revenues never come close to the 
projections made by proponents. As a result, the main 
``benefit'' of an FTT is never worth the costs.
    I was gratified to receive very positive feedback on my 
research and memo. More importantly--and quite correctly--the 
Obama administration never pursued a policy of trying to impose 
an FTT in the United States.
    More recently, I have become aware of additional research 
that shows FTTs have harmful effects beyond direct capital 
markets effects. An FTT imposed in the United States would harm 
everyday Americans in a number of ways:
    1. An FTT would harm everyday Americans saving and 
investing for retirement. Main Street investors would pay the 
tax directly when they trade, and pay it again as financial 
intermediaries pass on the taxes they face as a cost of doing 
business. \4\ According to one study, under the version of the 
tax proposed by Senator Bernie Sanders (D-VT), a typical 
retirement investor will end up with 8.5 percent less in his or 
her 401(k) or IRA after a lifetime of savings. \5\ In dollar 
terms, the average IRA investor would have $20,000 less at 
retirement as a result of this tax. \6\ FTTs paid by pension 
funds would reduce their returns and worsen existing problems 
with underfunded pensions. \7\
---------------------------------------------------------------------------
     \4\ See, e.g., ``Financial Transaction Taxes: A Tax on Investors, 
Taxpayers, and Consumers'', James J. Angel, Center for Capital Markets 
Competitiveness (2019), available at https://
www.centerforcapitalmarkets.com/resource/financial-transaction-taxes-a-
tax-on-investors-taxpayers-and-consumers/.
     \5\ Id.
     \6\ Id.
     \7\ See, e.g., Angel (2019); and ``The Hidden Costs of a Financial 
Transaction Tax: Estimated Impact on Pension Funds'', Kirsten Wegner, 
Modern Markets Initiative (2018), available at https://
www.modernmarketsinitiative.org/ftt.
---------------------------------------------------------------------------
    2. An FTT would harm the owners, workers, and customers of 
businesses. FTTs increase the cost of capital for any company 
whose securities are subject to the FTT. As a result, owners of 
those companies--including Main Street investors who hold those 
securities directly or indirectly in mutual funds and exchange-
traded funds (ETFs)--would be harmed through lower returns to 
capital. \8\ Workers would be harmed through lower returns to 
labor. \9\ Customers would be harmed through an increase in the 
cost of consumer goods. \10\
---------------------------------------------------------------------------
     \8\ See, e.g., ``The Impact of a Financial Transactions Tax'', 
Colin Miller and Anna Tyger, Tax Foundation Fiscal Fact No. 690 (2020), 
available at https://files.taxfoundation.org/20200122152248/The-Impact-
of-a-Financial-Transactions-Tax.pdf; and Angel (2019).
     \9\ Id.
     \10\ Id.
---------------------------------------------------------------------------
    3. An FTT would harm all American taxpayers. In addition to 
the increased costs of consumer goods, everyday Americans would 
be harmed by other indirect effects of FTTs. The level and 
growth of GDP would be reduced under an FTT, resulting in a 
lower standard of living. \11\ Moreover, indirect tax effects 
would pernicious and counterproductive. Lower income and 
payroll taxes would result from the increased cost of capital 
to businesses, and the incentive to hold off on the sale of 
financial assets to avoid capital gains taxation would 
exacerbate the lock-in effect of these taxes. \12\
---------------------------------------------------------------------------
     \11\ Id.
     \12\ Id.
---------------------------------------------------------------------------
                                ------                                


       RESPONSES TO WRITTEN QUESTIONS OF SENATOR HAGERTY
                    FROM MICHAEL S. PIWOWAR

Q.1. The recent volatility in certain stocks has increased talk 
about imposing a financial transaction tax as a downpayment on 
the Democrats' pmtisan $1.9 trillion dollar, decade-long 
spending spree. This would likely raise trading costs, weaken 
market liquidity, harm pensions, and limit everyday Americans' 
access to investing.
    What are some of the adverse effects of imposing a 
financial transaction tax, including on the global 
competitiveness of U.S. capital markets?

A.1. Imposing a financial transaction tax (FTT) in the United 
Sates would result in many negative effects, including 
unnecessarily hurting the global competitiveness of U.S. 
capital markets.
    In 2009, when I was a senior economist at the President's 
Council of Economic Advisers, I was asked to conduct research 
and prepare a memo for President Obama's top economic policy 
advisors on the potential effects of a financial transaction 
tax. My research showed that, without exception, every time an 
FTT was introduced in another jurisdiction, it resulted in 
disastrous consequences. My research yielded three key points:
    1. FTTs hurt market quality. Several empirical studies 
showed that the imposition of FTTs results in higher 
volatility, lower liquidity, and lower trading volume. \1\ As a 
result, FTTs have negative effects on price discovery and lead 
to a reduction in the information efficiency of markets. \2\
---------------------------------------------------------------------------
     \1\ See, e.g., ``Securities Transaction Taxes and Financial 
Markets'', Karl Habermeier and Andrei Kirilenko, IMF Working Paper 01-
51 (2001) available at http://www.imf.org/external/pubs/ft/wp/2001/
wp0151.pdf; and ``Transaction Taxes and the Behavior of the Swedish 
Stock Market'', Steven R. Umlauf, Journal of Financial Economics, Vol 
33, No. 2 (1993).
     \2\ Id.
---------------------------------------------------------------------------
    2. Jurisdictions that do not impose an FTT win at the 
expense of jurisdictions that do. For example, when the Sweden 
imposed an FTT in the 1980s, a significant amount of trading 
volume simply move to the London stock market. \3\ Keep in mind 
that this occurred 40 years ago when it was much more difficult 
and costly to divert trading activity across borders. A similar 
tax today would result in immediate and devastating results.
---------------------------------------------------------------------------
     \3\ See, e.g., Umlauf (1993).
---------------------------------------------------------------------------
    3. FTTs never raise the expected revenue. Because trading 
volume declines (and moves to other jurisdictions) when FTTs 
are imposed, actual FTT revenues never come close to the 
projections made by proponents. As a result, the main 
``benefit'' of an FTT is never worth the costs.
    I was gratified to receive very positive feedback on my 
research and memo. More importantly--and quite correctly--the 
Obama administration never pursued a policy of trying to impose 
an FTT in the United States.
    More recently, I have become aware of additional research 
that shows FTTs have harmful effects beyond direct capital 
markets effects. An FTT imposed in the United States would harm 
everyday Americans in a number of ways:
    1. An FTT would harm everyday Americans saving and 
investing for retirement. Main Street investors would pay the 
tax directly when they trade, and pay it again as financial 
intermediaries pass on the taxes they face as a cost of doing 
business. \4\ According to one study, under the version of the 
tax proposed by Senator Bernie Sanders (D-VT), a typical 
retirement investor will end up with 8.5 percent less in his or 
her 401(k) or IRA after a lifetime of savings. \5\ In dollar 
terms, the average IRA investor would have $20,000 less at 
retirement as a result of this tax. \6\ FTTs paid by pension 
funds would reduce their returns and worsen existing problems 
with underfunded pensions. \7\
---------------------------------------------------------------------------
     \4\ See, e.g., ``Financial Transaction Taxes: A Tax on Investors, 
Taxpayers, and Consumers'', James J. Angel, Center for Capital Markets 
Competitiveness (2019), available at https://
www.centerforcapitalmarkets.com/resource/financial-transaction-taxes-a-
tax-on-investors-taxpayers-and-consumers/.
     \5\ Id.
     \6\ Id.
     \7\ See, e.g., Angel (2019); and ``The Hidden Costs of a Financial 
Transaction Tax: Estimated Impact on Pension Funds'', Kirsten Wegner, 
Modern Markets Initiative (2018), available at https://
www.modernmarketsinitiative.org/ftt.
---------------------------------------------------------------------------
    2. An FTT would harm the owners, workers, and customers of 
businesses. FTTs increase the cost of capital for any company 
whose securities are subject to the FTT. As a result, owners of 
those companies--including Main Street investors who hold those 
securities directly or indirectly in mutual funds and exchange-
traded funds (ETFs)--would be harmed through lower returns to 
capital. \8\ Workers would be harmed through lower returns to 
labor. \9\ Customers would be harmed through an increase in the 
cost of consumer goods. \10\
---------------------------------------------------------------------------
     \8\ See, e.g., ``The Impact of a Financial Transactions Tax'', 
Colin Miller and Anna Tyger, Tax Foundation Fiscal Fact No. 690 (2020), 
available at https://files.taxfoundation.org/20200122152248/The-Impact-
of-a-Financial-Transactions-Tax.pdf; and Angel (2019).
     \9\ Id.
     \10\ Id.
---------------------------------------------------------------------------
    3. An FTT would harm all American taxpayers. In addition to 
the increased costs of consumer goods, everyday Americans would 
be harmed by other indirect effects of FTTs. The level and 
growth of GDP would be reduced under an FTT, resulting in a 
lower standard of living. \11\ Moreover, indirect tax effects 
would pernicious and counterproductive. Lower income and 
payroll taxes would result from the increased cost of capital 
to businesses, and the incentive to hold off on the sale of 
financial assets to avoid capital gains taxation would 
exacerbate the lock-in effect of these taxes. \12\
---------------------------------------------------------------------------
     \11\ Id.
     \12\ Id.
---------------------------------------------------------------------------
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR DAINES
                    FROM MICHAEL S. PIWOWAR

Q.1. Many of my colleagues across the aisle have recently 
spoken in favor of implementing a Financial Transaction Tax 
(FTT). They argue that doing so is necessary in order to reduce 
market volatility and make sure that Wall Street is paying its 
fair share. However, given that data from the Federal Reserve 
shows that 53 percent of U.S. families owned some form of 
publicly traded stock in 2019 and that 80-100 million Americans 
have a 401k, what impact would the imposition of a FTT have on 
pensioners and retail investors?

A.1. An FTT imposed in the United States would harm everyday 
Americans in a number of ways:
    1. An FTT would harm everyday Americans saving and 
investing for retirement. Main Street investors would pay the 
tax directly when they trade, and pay it again as financial 
intermediaries pass on the taxes they face as a cost of doing 
business. \1\ According to one study, under the version of the 
tax proposed by Senator Bernie Sanders (D-VT), a typical 
retirement investor will end up with 8.5 percent less in his or 
her 401(k) or IRA after a lifetime of savings. \2\ In dollar 
terms, the average IRA investor would have $20,000 less at 
retirement as a result of this tax. \3\ FTTs paid by pension 
funds would reduce their returns and worsen existing problems 
with underfunded pensions. \4\
---------------------------------------------------------------------------
     \1\ See, e.g., ``Financial Transaction Taxes: A Tax on Investors, 
Taxpayers, and Consumers'', James J. Angel, Center for Capital Markets 
Competitiveness (2019), available at https://
www.centerforcapitalmarkets.com/resource/financial-transaction-taxes-a-
tax-on-investors-taxpayers-and-consumers/.
     \2\ Id.
     \3\ Id.
     \4\ See, e.g., Angel (2019); and ``The Hidden Costs of a Financial 
Transaction Tax: Estimated Impact on Pension Funds'', Kirsten Wegner, 
Modern Markets Initiative (2018), available at https://
www.modernmarketsinitiative.org/ftt.
---------------------------------------------------------------------------
    2. An FTT would harm the owners, workers, and customers of 
businesses. FTTs increase the cost of capital for any company 
whose securities are subject to the FTT. As a result, owners of 
those companies--including Main Street investors who hold those 
securities directly or indirectly in mutual funds and exchange-
traded funds (ETFs)--would be harmed through lower returns to 
capital. \5\ Workers would be harmed through lower returns to 
labor. \6\ Customers would be harmed through an increase in the 
cost of consumer goods. \7\
---------------------------------------------------------------------------
     \5\ See, e.g., ``The Impact of a Financial Transactions Tax'', 
Colin Miller and Anna Tyger, Tax Foundation Fiscal Fact No. 690 (2020), 
available at https://files.taxfoundation.org/20200122152248/The-Impact-
of-a-Financial-Transactions-Tax.pdf; and Angel (2019).
     \6\ Id.
     \7\ Id.
---------------------------------------------------------------------------
    3. An FTT would harm all American taxpayers. In addition to 
the increased costs of consumer goods, everyday Americans would 
be harmed by other indirect effects of FTTs. The level and 
growth of GDP would be reduced under an FTT, resulting in a 
lower standard of living. \8\ Moreover, indirect tax effects 
would pernicious and counterproductive. Lower income and 
payroll taxes would result from the increased cost of capital 
to businesses, and the incentive to hold off on the sale of 
financial assets to avoid capital gains taxation would 
exacerbate the lock-in effect of these taxes. \9\
---------------------------------------------------------------------------
     \8\ Id.
     \9\ Id.

Q.2. If the U.S. were to institute an FTT, would you expect 
many films would moving their trading operations to an 
---------------------------------------------------------------------------
international exchange with a more hospitable tax environment?

A.2. Jurisdictions that do not impose an FTT win at the expense 
of jurisdictions that do. For example, when the Sweden imposed 
an FTT in the 1980s, a significant amount of trading volume 
simply move to the London stock market. \10\ Keep in mind that 
this occurred 40 years ago when it was much more difficult and 
costly to divert trading activity across borders. A similar tax 
imposed in the United States today would result in immediate, 
devastating, quite possibly irreversible results.
---------------------------------------------------------------------------
     \10\ See, e.g., Umlauf (1993).

Q.3. Is it your belief that Congress should actively use the 
tax code to limit the practice of short selling? And is there 
any evidence to suggest that imposing an FTT would reduce the 
---------------------------------------------------------------------------
prevalence of short selling?

A.3. Imposing a financial transaction tax (FTT) in the United 
Sates would result in many negative effects, including 
unnecessarily hurting the global competitiveness of U.S. 
capital markets.
    In 2009, when I was a senior economist at the President's 
Council of Economic Advisers, I was asked to conduct research 
and prepare a memo for President Obama's top economic policy 
advisors on the potential effects of a financial transaction 
tax. My research showed that, without exception, every time an 
FTT was introduced in another jurisdiction, it resulted in 
disastrous consequences. In addition to finding that 
jurisdictions that do not impose an FTT win at the expense of 
jurisdictions that do (as I mentioned in my answer to your 
previous question, my research also found:
    1. FTTs hurt market quality. Several empirical studies 
showed that the imposition of FTTs results in higher 
volatility, lower liquidity, and lower trading volume. \11\ As 
a result, FTTs have negative effects on price discovery and 
lead to a reduction in the information efficiency of markets. 
\12\
---------------------------------------------------------------------------
     \11\ See, e.g., ``Securities Transaction Taxes and Financial 
Markets'', Karl Habermeier and Andrei Kirilenko, IMF Working Paper 01-
51 (2001) available at http://www.imf.org/external/pubs/ft/wp/2001/
wp0151.pdf; and ``Transaction Taxes and the Behavior of the Swedish 
Stock Market'', Steven R. Umlauf, Journal of Financial Economics, Vol. 
33, No. 2 (1993).
     \12\ Id.
---------------------------------------------------------------------------
    2. FTTs never raise the expected revenue. Because trading 
volume declines (and moves to other jurisdictions) when FTTs 
are imposed, actual FTT revenues never come close to the 
projections made by proponents. As a result, the main 
``benefit'' of an FTT is never worth the costs.
    I was gratified to receive very positive feedback on my 
research and memo. More importantly--and quite correctly--the 
Obama administration never pursued a policy of trying to impose 
an FTT in the United States.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR DAINES
                     FROM ANDREW N. VOLLMER

Q.1. Many of my colleagues across the aisle have recently 
spoken in favor of implementing a Financial Transaction Tax 
(FTT). They argue that doing so is necessary in order to reduce 
market volatility and make sure that Wall Street is paying its 
fair share. However, given that data from the Federal Reserve 
shows that 53 percent of U.S. families owned some form of 
publicly traded stock in 2019 and that 80-100 million Americans 
have a 401k, what impact would the imposition of a FTT have on 
pensioners and retail investors?

A.1. The idea of an FTT is hotly debated. Supporters argue that 
an FTT would raise revenue for the government, reduce trading 
in securities, especially by high frequency traders, fall more 
on the wealthy than on middle- and low-income people, and 
therefore reduce the gap between the wealthy and less wealthy. 
\1\ Opponents argue that an FTT would be harmful. \2\ Extensive 
academic literature on FTTs exists. \3\ Scholars for the 
Mercatus Center have contributed to this literature. \4\
---------------------------------------------------------------------------
     \1\ Naomi Jagoda, ``Financial Trade Tax Gains Traction with 2020 
Democrats'', The Hill, February 25, 2020.
     \2\ SIFMA, ``A Financial Transaction Tax Is a Retirement Tax Which 
Harms Working Americans'', the U.S. Capital Markets and Individual 
Investors, 2019.
     \3\ See, for example, Jean-Edouard Colliard and Peter Hoffmann, 
``Financial Transaction Taxes, Market Composition, and Liquidity'', 
Journal of Finance 72, no. 6 (2017): 2685-2716. Further studies are 
cited in Leonard E. Burman et al., ``Financial Transaction Taxes in 
Theory and Practice'', National Tax Journal 69, no. 1 (2016): 171-216; 
and George H.K. Wang and Jot Yau, ``Would a Financial Transaction Tax 
Affect Financial Market Activity?'' (Policy Analysis No. 702, Cato 
Institute, Washington, DC, July 9, 2012).
     \4\ Phillip Swagel and Cynthia Boruchowicz, ``Policies To Address 
Income Inequality and Increase Economic Opportunities for Low-Income 
Families'' (Mercatus Research, Mercatus Center at George Mason 
University, Arlington, VA, May 2017), 26-27; Holly A. Bell, ``Using the 
Market to Manage Proprietary Algorithmic Trading'', in Reframing 
Financial Regulation: Enhancing Stability and Protecting Consumers, ed. 
Hester Peirce and Benjamin Klutsey (Arlington, VA: Mercatus Center at 
George Mason University, 2016), 262-65; George H.K. Wang, ``Securities 
Transaction Taxes and Market Quality of Equity and Futures Markets: 
Issues and Evidence'' (Mercatus Research, Mercatus Center at George 
Mason University, Arlington, VA, March 2014).
---------------------------------------------------------------------------
    The cost of an FTT would fall on both professional 
investors and individual investors. An FTT would reduce the net 
returns of retail investors and retirees who have mutual funds 
or retirement funds because retirement plans and mutual funds 
buy and sell securities, which are transactions that would be 
subject to the tax. Writers dispute the amount of the cost to 
individuals with retirement accounts or mutual funds. \5\
---------------------------------------------------------------------------
     \5\ Michael Edesess, ``Vanguard Opposes a Tax on Wall Street Its 
Founder John Bogle Favored--and the Reason May Surprise You'', 
MarketWatch, September 3, 2020. According to Edesess, ``The real burden 
of an FTT will fall on the professional traders.'' SIFMA, ``A Financial 
Transaction Tax Is a Retirement Tax''; Burton G. Malkiel and George U. 
Sauter, ``A Transaction Tax Would Hurt All Investors'', Wall Street 
Journal, December 8, 2009. According to Sauter, `` `Wall Street' would 
not foot the bill for the presumed $150 billion tax. In fact, the tax 
would simply be added to the cost of doing business, burdening all 
investors, including 401(k) plans, IRAs and mutual funds.''
---------------------------------------------------------------------------
    Financial economists do not agree on all the effects of an 
FTT. They do tend to agree that a tax would reduce the volume 
of securities trading and would not produce as much revenue as 
expected. \6\ Some analysts claim that an FTT could cause 
riskier investments or more price volatility. \7\ It might be 
fair to say that the tax would alter securities trading 
behavior in unexpected and unintended ways.
---------------------------------------------------------------------------
     \6\ Colin Miller and Anna Tyger, ``The Impact of a Financial 
Transactions Tax'' (Fiscal Fact No. 690, Tax Foundation, Washington, 
DC, January 2020), 1.
     \7\ Miller and Tyger, ``The Impact of a Financial Transactions Tax 
1''.
---------------------------------------------------------------------------
    Supporters of an FTT believe that it will discourage high-
frequency trading (HFT). \8\ Neither Congress nor the staff of 
the SEC have concluded that HFT should be discouraged. As late 
as 2018, Congress had not determined that HFT causes undue 
harms that needed to be regulated and instead was keeping its 
policy options open while collecting further evidence. In 
legislation, Congress instructed the SEC staff to prepare a 
report assessing the benefits and risks of algorithmic trading 
to equity and debt markets and recommending necessary changes 
to Federal regulation. \9\ (For practical purposes, algorithmic 
trading is another term for HFT.)
---------------------------------------------------------------------------
     \8\ Aaron Klein, ``What Is a Financial Transaction Tax?'' Voter 
Vitals, Brookings Policy, March 27, 2020).
     \9\ Economic Growth, Regulatory Relief, and Consumer Protection 
Act, Pub. L. No. 115-174 502, 132 Stat. 1296, 1361-62 (2018).
---------------------------------------------------------------------------
    The SEC staff delivered the requested report in early 
August 2020 but did not recommend any additional regulation to 
curtail HFT activities. \10\ In fact, the staff did not 
conclude that harms from HFT outweigh the benefits and, if 
anything, dwelled more on the benefits. Algorithmic trading in 
the equities markets, the staff wrote, ``has improved many 
measures of market quality and liquidity provision during 
normal market conditions, though studies have also shown that 
some types of algorithmic trading may exacerbate periods of 
unusual market stress or volatility.'' \11\ In addition, the 
SEC staff discerned that algorithms help market participants 
reduce risks from the increasing complexity of many 
interconnected markets. \12\
---------------------------------------------------------------------------
     \10\ Staff of the Securities and Exchange Commission, Staff Report 
on Algorithmic Trading in U.S. Capital Markets, August 5, 2020.
     \11\ Staff of the Securities and Exchange Commission, Staff Report 
on Algorithmic Trading in U.S. Capital Markets, 4.
     \12\ Staff of the Securities and Exchange Commission, 4.
---------------------------------------------------------------------------
    The staff also surveyed the academic literature and 
concluded that, ``Overall, most academic studies find that 
algorithmic trading and HFTs have improved market quality and 
helped reduce transaction costs. There is ample evidence 
suggesting that, under normal market conditions, algorithmic 
trading and HFTs improve liquidity and price efficiency and 
reduce short term volatility.'' \13\
---------------------------------------------------------------------------
     \13\ Staff of the Securities and Exchange Commission, 70 (footnote 
omitted). According to the report, most studies ``find that algorithmic 
trading and high-frequency trading improve price efficiency and 
decrease the time it takes for prices to incorporate new information.'' 
Staff of the Securities and Exchange Commission, Staff Report on 
Algorithmic Trading in U.S. Capital Markets, 77.
---------------------------------------------------------------------------
    The staff noted that evidence of the effect of high-speed 
trading in periods of stress was mixed. At least ``some 
academic studies . . . find that algorithmic trading and high-
frequency trading continue to reduce volatility during periods 
of heightened volatility.'' \14\
---------------------------------------------------------------------------
     \14\ Staff of the Securities and Exchange Commission, Staff Report 
on Algorithmic Trading in U.S. Capital Markets, 79.

Q.2. If the U.S. were to institute an FTT, would you expect 
many firms would move their trading operations to an 
---------------------------------------------------------------------------
international exchange with a more hospitable tax environment?

A.2. Capital flows freely across international boundaries and 
seeks the most efficient markets. Adding costs with a new 
securities tax in the United States inevitably will drive some 
amount of securities trading to lower-cost jurisdictions. 
According to economist Aaron Klein, ``Several countries 
attempted large FTTs in the past and experienced significant 
capital migration.'' \15\
---------------------------------------------------------------------------
     \15\ Klein, ``What Is a Financial Transaction Tax?''; Bell, 
``Using the Market''.

Q.3. Is it your belief that Congress should actively use the 
tax code to limit the practice of short selling? And is there 
any evidence to suggest that imposing an FTT would reduce the 
---------------------------------------------------------------------------
prevalence of short selling?

A.3. Short selling is socially valuable. Short sellers help to 
discover accurate prices and to identify companies that are 
overvalued or engaged in questionable conduct. Academic studies 
do not support the claims that short selling causes distress in 
the securities markets. \16\ Tax and regulatory policy should 
treat short selling and short covering no better and no worse 
than long buying and selling. Tax, disclosure, and other 
obligations should be comparable and not more onerous for short 
transactions.
---------------------------------------------------------------------------
     \16\ For example, see Peter Molk and Frank Partnoy, ``The Long-
Term Effects of Short Selling and Negative Activism'', University of 
Illinois Law Review (forthcoming). See also Ekkehart Boehmer and Juan 
Wu, ``Short Selling and the Price Discovery Process'', Review of 
Financial Studies 26, no. 2 (2013): 287-322. The authors state that 
stock prices are more accurate when short sellers are more active. See 
also Alessandro Beber and Marco Pagano, ``Short-Selling Bans Around the 
World: Evidence From the 2007-09 Crisis'', Journal of Finance 68, no. 1 
(2013): 343-81. According to Beber and Pagano, bans (a) were 
detrimental for liquidity, especially for stocks with small market 
capitalization, high volatility, and no listed options; (b) slowed down 
price discovery, especially in bear market phases, and (c) failed to 
support stock prices, except possibly for U.S. financial stocks). See 
also Pedro A.C. Saffi and Kari Sigurdsson, ``Price Efficiency and Short 
Selling'', Review of Financial Studies 24, no. 3 (2011): 821-52. Saffi 
and Sigurdsson report that relaxing short-sales constraints are not 
associated with an increase in either price instability or the 
occurrence of extreme negative returns). Finally, see Securities and 
Exchange Commission, Office of Economic Analysis, ``Economic Analysis 
of the Short Sale Price Restrictions under the Regulation SHO Pilot'', 
February 6, 2007. This report provides analysis of price restrictions 
on short sales.
---------------------------------------------------------------------------
    If an FTT is applied neutrally and equally to all 
securities sales and purchases, it would reduce short selling 
and covering to the same extent as long buying and selling. I 
am not aware of evidence that an FTT would reduce short sales 
more than it would reduce other securities transactions. As 
mentioned earlier, most commentators agree that an FTT would 
reduce the number of securities transactions.
    The main objective of the Federal tax system should be to 
raise revenue to fund Congress's expenditures at the least cost 
to economic activity. Using tax provisions to encourage or 
discourage particular types of conduct or to benefit or 
penalize particular groups or activities leads to complexity in 
the law, difficulties in complying with the law, concealed 
differential treatment, and unforeseen and unpredictable 
consequences.
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