August 6, 2018

“Crypto Mom?” Commissioner Peirce Makes Lots of New Friends

It seems that SEC Commissioner Hester Peirce could teach Dale Carnegie a thing or two about how to win friends & influence people – at least on the Internet, where she’s become “Twitter famous” & earned the moniker “Crypto Mom.” According to this “Quartz” article, Commissioner Peirce owes her new-found popularity to her dissent from the SEC’s recent decision to refuse to allow the Winklevoss brothers to list their bitcoin ETF:

Crypto Twitter is rallying behind a sympathetic watchdog at the US Securities and Exchange Commission. Not long after commissioner Hester Peirce dissented from the agency’s rejection of a bitcoin exchange-traded fund, her count of Twitter followers soared.

Peirce’s social media exposure got a boost from a Reddit user who goes by lamb0x, who called for readers on the site to “show her some love from the Crypto Community.” She’s not the first buttoned-down American official to win Twittersphere adoration — the Chair of the Commodity Futures Trading Commission, Chris Giancarlo, had his turn in February after he gave Senators an unexpected education on crypto slang during a hearing.

Giancarlo was dubbed “Crypto Dad” by the cryptorati; inevitably, Peirce earned the moniker “Crypto Mom” from some Redditors.

The article includes a chart showing that Commissioner Peirce’s following on Twitter skyrocketed from around 1000 followers to more than 10,000 after her dissent.

Speaking of Twitter, be sure to follow Broc (@BrocRomanek) and Liz (@LizDunshee) – they tweet interesting & relevant stuff. You can follow me too if you want (@JohnJenkins36), but I mostly just whine about the Cleveland Browns.

SEC’s Proposed Transaction Fee Pilot: “Come at Me, Bro!”

Last March, the SEC proposed to implement a “Transaction Fee Pilot,” which would analyze the effects that fees & rebates have on how brokers route their orders to competing markets. It sounds pretty boring, but the comment process for this one has gone off the rails – accusations of “fearmongering” and “misleading” statements have been hurled by one side, while the other has been accused of “making a mockery” of the comment process.

So what is it about the proposal that’s causing such a ruckus? Well, one reason may be that public company stocks are going to play the role of “guinea pigs.” The SEC wants to create three test groups, each composed of 1,000 listed stocks. Each of these groups would have different levels of permissible transaction fees & rebates. For the remaining 5000 or so stocks serving as a control group, it would be business as usual. As proposed, the Pilot would run for up to two years, and companies would not be permitted to opt out from participating in it.

This “IR Magazine” article says that most major institutional investors are all-in on the Pilot, but that the Nasdaq & NYSE are not happy. In addition to concerns about driving trading away from the exchanges, the NYSE in particular has flagged some potentially significant downside consequences for listed companies:

Consider two hypothetical companies which are similar in profile. Both are large listed financial institutions with similar size, business profile and market capitalization. Company A is included in one of the SEC’s Transaction Fee Pilot. Company B is not included and still benefits from an exchange rebate program. We would expect Company A’s average bid-ask spread to widen due to the reduced or eliminated exchange rebates.

All else equal, Company A will now be a less appealing investment than Company B, as a wider bid-ask spread means that investors’ transactions costs will be higher when trading Company A’s stock compared to Company B’s stock.

The NYSE goes on to point out that wider spreads could make securities offerings & buybacks more expensive, and encourages listed companies to weigh-in through the comment process. Some heavy hitters – including P&G, Home Depot & Mastercard – have done so. One of the points made in several comment letters is the Pilot’s potential impact on peer group metrics. Here’s an excerpt from Mastercard’s letter:

The SEC has stated that stocks would be grouped into the control group and test groups based on stratified sampling by market capitalization, share price, and liquidity. This makes it likely that MasterCard, if included in the Pilot, would be separated from a peer group of companies that market partipants and investors compare to assess MasterCard’s financial performance. This separation could distort peer group metrics and complicate the comparison of peers by investors.

A number of companies have also asked to be put in the study’s control group if the study moves forward. In response, the CII followed up with a letter of its own to the directors of the 37 companies that opposed the proposal expressing its concerns about their opposition and its own “enthusiastic support” for the proposal.

The back-and-forth between one pair of commenters has gotten quite heated. In June, the Investors Exchange submitted a letter characterizing the NYSE’s statements as “fearmongering” built on a set of “knowingly false premises.” That prompted a blistering reply from the NYSE, in which it accused the IEX of “making a mockery of the Commission’s comment process” & targeting the NYSE in an attempt “to blame the NYSE for its own business failures.”

ICOs: The First “Token Securities Exchange” on the Horizon?

While the NYSE & IEX were slinging mud over the SEC’s Pilot Program, crypto-platform Coinbase was taking the first steps toward becoming the first national securities exchange for tokens. This recent blog from Gunster’s Gus Schmidt has the details. Here’s an excerpt:

In order to operate an exchange for securities, an entity must register as a national securities exchange or operate under an exemption from registration, such as the exemption provided for alternative trading systems (ATS) under SEC Regulation ATS. An entity that wants to operate an ATS must first register with the SEC as a broker-dealer, become a member of a self-regulating organization, such as FINRA, and file an initial operation report with the SEC on Form ATS.

Because Coinbase is neither registered as a national securities exchange nor operates under an exemption, it cannot operate an exchange-based trading platform for blockchain-based securities. However, the recently announced acquisitions indicate that Coinbase may be headed in that direction. The three companies acquired by Coinbase were:

– Venovate Marketplace, Inc. (registered as a broker-dealer and licensed to operate an ATS)
– Keystone Capital Corp. (registered as a broker-dealer)
– Digital Wealth LLC (registered as an investment advisor)

The blog points out that by acquiring licensed entities, Coinbase may be able to speed up its plan to create an exchange-based trading platform for blockchain-based securities.

John Jenkins