SEC's Vision for Competition in Markets Would Stifle Innovation

Securities and Exchange Commission Chair Gary Gensler recently gave a speech called “Competition and the Two SECs.” It should been called “The SEC and Two Competitions.” To most people, competition is something that happens in the market. Buyers and sellers do what they want, and intermediaries offer innovations that either succeed or fail. The job of regulators is not to pick winners and losers, nor to limit choices, but to set general rules and to stop illegal practices. To Gensler, it seems, competition is the opposite. It’s something set by regulators, who tell buyers, sellers and intermediaries what to do, in order to make markets work the way regulators think best.

The difference is illustrated with the two sports analogies Gensler uses. In cross-country races, there are few rules. You can’t ride a bicycle or shoot the other runners, but these serve to define the sport and enforce general laws, not to micromanage how competitors run. This is what most people call pure competition.

Football, though, requires a 245-page rulebook, most of which is unknown to players, coaches, fans and commentators. Few of the rules are the basic definitions of the sport or prohibitions against felonies, rather they’re designed by administrators to make the game play out they way they imagine it should. If fans are getting bored by too many field-goal attempts, tweak the rules to make field goals less attractive. If the action is too slow for television, tweak the rules to speed it up. Football is a sport heavily regulated to produce a very specific kind of competition favored by administrators. This necessarily blocks innovation unless it first goes through an exhaustive regulatory process.

Gensler’s proposals are all to reduce choice by investors, capital users and intermediaries and to block innovation; all in order to produce the specific type of competition he prefers. For example, he notes large intermediaries can lower costs to investors and capital users via “scale, network effects, and access to valuable data.” He then points out, “technological innovations repeatedly disrupt incumbent business models.” This is what most people call competition. Winning intermediaries get bigger and thereby reduce costs, but smaller entities are always emerging with successful innovations. Investors and capital users can choose between the known low-cost large providers or the new possibilities offered by emerging providers.