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It’s sunset. A low breeze sends tumbleweeds rolling across the path of a lone horse and his rider as they make their way into town. Windows & saloon doors creak shut as the rider passes into the town square, where several infamous, dangerous bank robbers await him. The rider stops & dismounts his horse, letting the fading sunlight reflect off his holstered revolver. The robbers take notice and approach.
“Who are you?”
No answer.
Tensions are rising. The men twitch their gun-fingers, preparing for a fight.
(Source)
This scene comes from the iconic 1964 Spaghetti Western film A Fistful of Dollars, starring Clint Eastwood in his first leading role that would send him to global stardom. The movie follows Eastwood’s character, “The Man With No Name”, as he takes a job tracking down two rival criminal gangs & bringing them to justice using any means necessary.
This scene also comes to mind when hearing news of Gary Gensler’s swearing in ceremony to become Chairman of the Securities & Exchange Commission, which took place April 14. Like Eastwood’s character, Gensler returns to the public spotlight a grizzled veteran in his field, with a reputation for pushing through serious regulatory change & now the power to make Wall Street shake in their boots once again. The potential overhaul that could come from Gensler’s time at the SEC cannot be overstated. Who is this new sheriff in town? What changes can Wall Street, and exchanges in particular, come to expect from his administration?
Wall Street’s Poster Child
Gary Gensler spent his childhood in 1960s Baltimore, where he was first introduced to entrepreneurship by his father who ran a pinball machine business at surrounding bars & restaurants. Early academic success propelled Gensler to Wharton, one of the nation’s top business schools with alumni including Warren Buffett, Steve Cohen, Nassim Taleb, and Elon Musk. After graduating with a Wharton MBA in 1979, Gensler followed the well-worn path towards finance’s upper echelon & took a job at Goldman Sachs.
What followed was a resumé you’d expect to read from someone like CEO Lloyd Blankfein or David Solomon - Gensler spent the next 18 years at Goldman, becoming the bank’s then youngest partner at 30 years of age. Notable projects while at the bank included advising a record NFL television rights deal, leading the Tokyo office’s fixed income trading group, and serving as co-head of global finance. A senior executive job in or near the C-suite seemed only a few years & a press release away.
Despite his meteoric rise through Goldman Sachs & seemingly bright future ahead, Gensler decided to step away from the bank when he was nominated to serve in Bill Clinton’s Treasury Department as Assistant Secretary. Gensler’s nomination passed the Senate & his term began in September 1997, just as transformative financial regulations were beginning to take shape. While serving with the Clinton administration Gensler became known for helping pass the Commodity Futures Modernization Act of 2000, legislation that ensured OTC derivatives remained largely unregulated. Although it was inline with Clinton’s de-regulatory agenda, the legislation gave Gensler a reputation for being easy on Wall Street & his former Goldman Sachs colleagues in particular, which would come back to haunt him later in his career. For now, the ex-banker’s influence would only continue to grow.
After Clinton’s term ended in 2001, Gensler spent time advising Senator Paul Sarbanes & was instrumental in the passage of the Sarbanes-Oxley Act, which worked to tighten corporate reporting & accounting standards in the wake of the Enron & WorldCom scandals. He even published a book exposing the high costs of mutual funds & supported the idea of passive index investing, years before the trend caught on. Gensler’s rousing success story in the private & public sector stretched on for nearly a decade after his first job in DC, and it looked as if nothing would slow it down.
That is, until the global financial system blew up.
Crisis & Redemption
Beginning in 2007 and accelerating rapidly through 2008, a multi-year housing bubble burst in the US, shedding light on the unregulated part of the derivatives market Gensler & his Clinton-era colleagues avoided tackling in 2000. Systemically important bank balance sheets were exposed to toxic assets that were rapidly depreciating, and a government bailout seemed imminent.
As the financial crisis unfolded, Gensler is reported to have had a change of heart about regulating his former industry. Here are a few quotes taken at the time (emphasis added by me):
"We had the worst financial crisis in 80 years. We need bold reforms," Gensler says in an interview at his Washington office. "Looking back now, knowing what we know now, I think: Shouldn't we have done more?"
(Source)
And another:
Gensler retired in 1997 to join the Clinton Treasury team, where he agreed with his colleagues who argued against derivatives regulation. That's a position he now largely disavows. "I think we all evolve," he says. "In Washington, so often people don't like to admit that."
(Source)
A few quotes are fine and good, but what about action? In late 2008 Gensler was nominated by the incoming Obama administration to become Chairman of the CFTC, the small, out of the way regulator that had been shunned in past political agendas. Gensler’s nomination ran into opposition from progressives arguing he would simply continue to help his Wall Street friends avoid change. Bernie Sanders in particular was a staunch opponent of Gensler & put up the biggest fight to block his nomination. On the whole, however, Gensler had convinced DC he was a changed man, and was sworn in as CFTC head in late May 2009.
With a newfound seat of power at the CFTC, Gensler was able to prove his genuine desire to police the big banks & their unregulated playground, and prove it he did. The post-financial crisis period saw the greatest expansion of the CFTC’s influence since its inception, as sweeping derivatives regulation was included in Dodd-Frank and new burdens were placed on banks to trade less & in a transparent way. When news of LIBOR rigging surfaced in 2012, Gensler led a historic round of fines against the big banks amounting to nearly $6 billion in total. An anonymous Wall Street lobbyist, when asked about Gensler & his impact on the industry, simply replied:
New Challenges
After his term at the CFTC ended in 2014, it quickly became clear Gensler’s political career wasn’t finished. When Hillary Clinton launched her 2016 Presidential run she chose Gensler as campaign CFO. A Trump victory dashed hopes of a new position soon, but all wasn’t lost. Gensler took to teaching classes at MIT while biding his time for a Democrat to retake the White House.
Which brings us to today. A Democrat has indeed retaken the White House, giving Gensler an easy path to political power once again. What’s in store for the new head of the SEC? Gensler is taking over an agency whose situation is not unlike the CFTC in 2009. The SEC’s influence significantly faded under the Trump administration. Insider trading cases are near all-time lows. Repeated budget cuts have severely hindered the SEC’s ability to track & prosecute fraud. Celebrities walking the legal tight-rope like Elon Musk have blatantly taunted the agency with little consequence. While I believe Gensler will have the power to reverse some of this, the hole his predecessors have dug for him is a deep one. The equity markets are as close to the Wild West as they’ve been in a long time.
What impacts to exchanges can we expect from Gensler’s reign?
A Bitcoin ETF - Remember those classes Gensler taught at MIT? They were on cryptocurrencies, blockchain & their impact to the global financial system. Gensler has studied crypto, understands crypto, and is not oblivious to the radical changes happening as it relates to institutional adoption of Bitcoin. Under previous SEC leaders, a Bitcoin ETF hasn’t been approved because the underlying market was, in their opinion, too exposed to potential manipulation. Gensler may have a different opinion there, and his interest in crypto may turn into the best chance US markets have to see a Bitcoin ETF approved and launched. This means exchanges like CME, ICE, and Coinbase are likely to see materially higher interest in their crypto products as retail & institutional money flows into Bitcoin via the ETF.
More pro-exchange regulation - While at the CFTC, Gensler’s policies served to bring opaque financial markets like swaps & other derivatives out of the shadows, by mandating these markets trade on an exchange. In Gensler’s mind, requiring OTC derivatives to be traded on an exchange & cleared through a clearinghouse makes them more transparent & less exposed to systemic risks like in 2008. The same applies to LIBOR - after banks were found to have rigged the world’s most important interest rate, power over the benchmark was taken away from the banks & given to ICE instead. The post-financial crisis policies of Gensler’s CFTC were arguably the primary driver of exchange’s growing dominance in the 2010s. What banks were forced to drop, exchanges picked up. I suspect many seemingly “anti Wall Street” rules that come out of the SEC will hurt some market participants, but they most likely won’t be exchanges.
It’s not all good though - Exchanges have been fighting with the SEC, even during a pro-business administration, on market data fees & changing equity market structure to promote competition. I’m unsure where Gensler falls on this issue, but my guess is exchanges can expect more pressure to lower prices & suffer higher compliance costs with him as Chairman. As we enter a more aggressive SEC era, exchanges won’t be completely shielded from oversight & regulatory burden.
Honorable Mentions
I did a Twitter interview! Fellow Substack writer Frederik Neckar was kind enough to do a Q&A with me via Twitter on my background, the exchanges I follow, and the industry more broadly. I highly recommend checking it out here and subscribing to Neckar’s Substack, Neckar’s Notes.
The Options Clearing Corp, or OCC, has approved a significant fee reduction and a $156 million rebate for its clearing members after benefitting from massive options volumes in 2020 and YTD ‘21. The top options market makers today include Citadel Securities & Susquehanna who will see modest margin improvement from this news, while Virtu continues to ramp up its expansion into the options business.
MIAX, the upstart Miami options exchange with low double digit market share, is launching Corporate Tax Rate Futures this May. The futures contract, available to trade on CME’s Globex platform & cleared through the Minneapolis Grain Exchange, will let corporations & speculators hedge their corporate tax rate exposure or bet on future policy action.
Chart(s) of the Week
Two top exchange companies - Nasdaq & MarketAxess - reported earnings this week with varied market reaction.
Even against tough 2020 comps, Nasdaq posted stunning +40% growth in index revenue as its flagship technology benchmark saw heavy retail & institutional interest during the quarter. A rush of early SPAC launches also boosted results in its listings business, which saw its best quarter ever stretching back more than 20 years. The impressive performance of its high-margin recurring businesses, combined with strong option volumes, helped offset weakness in Market Technology.
(Source)
MarketAxess’s report was met with markedly less enthusiasm as the stock continues to languish this year. While revenue grew +16% on higher HY and emerging market bond volumes, the exchange’s flagship IG business saw flat market share growth & EPS grew only +8% on higher costs. MarketAxess is a high quality, high growth business, but the market needs more to bid up a stock trading at 60x-70x multiples, even in a low rate environment.
(Source)
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Disclaimer: I am not a financial advisor. Nothing on this site or in the Front Month newsletter should be considered investment advice. Any discussion about future results or projections may not pan out as expected. Do your own research & speak to a licensed professional before making any investment decisions. As of the publishing of this newsletter, I am long ICE, CME, TW, NDAQ and VIRT. I am also long Bitcoin & Ethereum.