SEC Commissioner Allison Herren Lee Addresses PFOF, Retail Trading and Crypto at STA Conference

Sarah Rudolph

Sarah Rudolph


In an interview Wednesday at the 88th Annual Security Traders Association Conference, SEC Commissioner Allison Herren Lee said she appreciated Gary Gensler, who testified Tuesday at the House Financial Services Committee oversight hearing, for “rolling up his sleeves” to address the complex issues facing the financial industry, such as payment for order flow (PFOF) and exchange for rebates. Gensler “brings a deep understanding” of the markets and those issues, Lee said, and any changes the SEC makes will go through a careful, deliberate process. 

There are “disruptive” changes going on in the industry, from PFOF to regulating cryptocurrencies. A big topic of discussion today is the boom in retail trading. The interviewer, Mina Nguyen of Jane Street Capital, noted that Lee has focused on making sure investors have enough information about PFOF and best execution, and asked Lee if she thought “we should ban payment for order flow or just provide investors with more information.”

“We don’t really limit ourselves to that dichotomy,” Lee said. “We have to look at the data before we know whether disclosure is sufficient, but we are not really asking if we should ban PFOF.” Lee said she continues to be concerned with the inherent conflicts of interest in PFOF. “At a minimum, there must be full disclosure,” she said.

There is also the question of the concentration of orders being routed to a small number of wholesalers, which can lead to fragility and impair competition and market quality, Lee said. “We have to make sure markets are safe and work for everyone,” she said. “Competition is a very important part of our mission. We have to understand why the system operates the way it does.”

Nguyen asked Lee about the appeal of zero commission trading, saying, “My nephew sees the conversation as ‘I can go to an easy zero-commission venue that may take PFOF.’  But can you imagine a system where we could have two to four more options for the investor to choose where they pay a commission?”

Lee said there are brokers out there now who have zero commission and don’t take payment for order flow. “So I don’t think it’s that kind of a head-on tradeoff. My five kids – in their 20s and 30s – all trade on phone-based apps. But do they understand who’s paying for that?” 

She added, “I’m definitely in favor of choice accompanied by full disclosure. I don’t rule out the idea of having different models to choose from. There is room for more than one model.”

Nguyen asked Lee if the U.S. will be at a competitive advantage or disadvantage in being behind other nations in developing digital asset frameworks separately. 

“We have some of the most robust capital markets in the world,” Lee said. “People and institutions have confidence in our markets.”  She said U.S. regulators have to evolve with the changes in technology but should not stray from their core mission, which built these markets to be as robust as they are.  

Digital assets provide less investor protection and oversight than traditional markets, Lee said. This means more opportunities and instances of fraud and manipulation and a wide gap between what investors know and what is actually going on. 

“These assets cross all kinds of [international] boundaries,” she said. “I don’t want to see a race to the bottom on this.”

Nguyen noted that there is currently more than $4 trillion in global Bitcoin exchange-traded products (ETPs) and asked if that contagion could spread to other, SEC-regulated markets. 

Lee said the SEC will keep an eye on that issue. Several Bitcoin ETP applications are now pending at the SEC, she said.  “These things cross jurisdictional borders. We must work with other countries’ regulators to watch the impact on the markets,” she added.

Nguyen asked if regulators in the U.S. could use the recently adopted European ESG and digital asset frameworks as a baseline and borrow from them.  

“Let’s have some basic [international] standards we agree to,” Lee said.  The SEC needs to cooperate with other jurisdictions on both ESG and digital assets, she added. 

Lee said she thought the industry had done a good job of rising to the challenges of the COVID-19 pandemic and that the SEC had put many important temporary relief measures in place. Long term questions will involve the issues of acting on sensitive information and supervisory concerns, she said. 

“We probably won’t ever quite go back to where things were” before COVID, she said. “We need to adapt to a large amount of the population working remotely. We don’t want reduced protections – just those that are tailored to our new environment. We have ask, ‘What are the unique challenges to people working remotely in this industry?'”

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