Speaking at a conference session on how global macroeconomic trends affect U.S. capital markets, Securities and Exchange Commission Chairman Jay Clayton said Wednesday the agency is “devoted” to “transparency and pricing.”
Clayton’s fireside chat, part of the SEC’s conference on the state of U.S. securities markets held in Washington D.C., was conducted alongside Glenn Hutchins, co-founder of Silver Lake Partners, and Gary Cohn, a former director of the U.S. National Economic Council (and former president and COO of Goldman Sachs). During the discussion, Clayton acknowledged regulators cannot afford to “use yesterday’s technology” to achieve their goals of transparency and investor protection.
How fast can trades be?
Asked by Clayton how technology is affecting markets today, Hutchins observed the financial services industry has shifted from trades that once took days to settle to securities trades that take place “in microseconds.” The “binding constraint” on trade speed “is how fast you can move electronics,” Hutchins said. Looking forward, he predicted that “we have the same capacity to make as big a transformation in the next 10 years.”
While the United States “has enjoyed an enviable position being the dominant capital market in the world,” Cohn cautioned that “we are on the fringe of potentially losing that position” as other capital markets increasingly use technology. “We have to embrace digitization,” Cohn said.
Unfortunately, the United States is not even “in the middle of the pack” in terms of technology evolution of the marketplace, Cohn said. What it needs to embark on is a “technological leap forward,” he continued.
Unintended consequences of regulatory reform
Clayton, acting as a moderator, asked whether technology and its effects are being measured in the right way when policy is made. “It could well be that we are not measuring the economy correctly,” Hutchins said, explaining the “information revolution” has yielded “enormous productivity growth which we are not measuring.”
As an example, Hutchins displayed his smartphone and called it “the greatest deflationary tool I’ve ever experienced.” Users should consider the price of what they used to pay for all of the things their smart phones and apps in them do for them now. Hutchins said he stopped comparing when he had $1,000 on one side of his chart (presumably, the price of his phone) and $20,000 on the other side.
“Our economy is harder to measure” as the United States becomes “a dominant service economy,” Cohn acknowledged. Experts are not so much assessing the number of cars coming off an assembly line as they are considering how many are buying beverages at Starbucks or going out to dinner, he said.
A 10-year spike in compliance costs, plus continued regulatory needs
A certain amount of negative unintended consequences resulted from the regulation that took place after the 2008 financial crisis, Cohn noted. “Regulation forced upon” the financial services industry “was so enormous,” he said.
Cohn recalled how all financial services companies had to add a significant amount of compliance costs to the system. Because those companies could not afford those costs, they outsourced some of the labor required to places like Bangalore.
An area where, perhaps, regulators might pay a bit more attention concerns climate change and cyber-risk. “Making sure that companies are adequately disclosing exposure” to climate change and cyber-risk “is very important,” Hutchins said. He predicted the next crisis may well be triggered by a cyber-incident. Indeed, Clayton acknowledged, the SEC is “talking about resiliency” in dealing with technological threats.
The future of cryptocurrency—and of payday lending
The discussion next turned to cryptocurrency and its future. “Today, roughly 92 percent of all currencies in the world” are digitized, Hutchins estimated. He said moving to a digital currency is a “straightforward thing to do”—essentially taking paper money and turning into a digitized form. “The thing most useful to the bad guys is cash,” he continued, calling paper money “the ultimate anonymized security.”
With a “digitized dollar,” payday lending would be eliminated, Cohn said. “The payday lender should not exist in America today,” he maintained. Rather, someone getting paid could take their digital wallet to an ATM to get money or use it at a point of sale, resulting in the addition “of a huge amount of disposal income into the system”—rather than paying 18 percent to payday lenders. Payment of income taxes could also become digitized, and someone could just hit a “calc” button to compute taxes (since all purchases will be recorded digitally). Tax fraud and a lack of tax collection could be a problem that is fixed, Cohn said.
Lori Tripoli is a writer based in the greater New York City area who focuses on legal and regulatory issues.