Hands Off? A Senate leader attacks moves to regulate Internet trading
By Jim McTague
Barron's
April 12, 1999
Zap! Sizzle! Pop! The Internet is fast becoming the new third rail of American politics, packing even higher voltage than Social Security. As a result, there's a surge of Internet boosterism in Washington. Vice President Al Gore boasts, first, of having fathered the Internet, then of having fostered it. Even politicians who view the largely unregulated Internet as a sort of Hole in the Wall, where criminals with computers can hack their way into your home and pocketbooks with impunity, carefully avoid the "R" word. Maine Sen. Susan Collins' Permanent Subcommittee on Investigations held two days of hearings on securities fraud on the Internet last month. But Collins doesn't dare propose directly regulating activities on the Internet. "That's a touchy subject," says her spokesman, Kirk Walder.
Touchy? Taboo is more like it. Because Chairman Phil Gramm of the Senate Banking Committee, the latest Internet champion and the Senate's leading overseer of the securities industry, has drawn a line in the sand regarding the Internet and regulation. Texan Gramm styles himself a sort of missile-defense system for online traders and investors, keyed to intercept and destroy what he deems are the kind of short-sighted rules and red tape that have handicapped traditional securities markets. In fact, a new securities bill that will emerge in coming weeks from the Banking Subcommittee on Securities for consideration by the full panel will take on any regulatory impediments that currently limit online trading, says Gramm.
Though Gramm declines to be specific yet about what supposed impediments rile him, the Securities and Exchange Commission last year introduced more than 500 pages of regulations that some like-minded free-marketeers contend hobble the innovators of online trading systems. Beginning April 21, online trading systems -- alternative trading systems, in the regulatory argot -- will have to register as either a stock exchange or a broker-dealer and comply with a host of added paperwork.
Those initial SEC regulations are not as onerous as they could have been, according to Dale Oesterle, a University of Colorado law professor and one of the few people to have read the regs cover to cover. "It's a declaration by the SEC: 'We are stepping into regulate,'" he says. As Oesterle sees it, the SEC dreams of establishing the perfect, integrated market. And, in fact, Congress in the 'Seventies mandated that the SEC move toward creation of a unified securities market.
Management of Instinet, a global brokerage firm, says the new regulations affect some of that company's operations, but Oesterle believes that many companies are confused about whether and how the regs apply to them. He argues that the new rules go well beyond the SEC's role of stopping fraud. "It's micromanaging," he says.
Financial markets have been fortunate thus far, Oesterle adds, because the new trading systems have been developed in the basements of entrepreneurs. The SEC, by playing protector instead of policeman, may stifle online creativity, he warns: "A lot of vested interests at the exchanges, like the floor traders, are threatened by technological changes and they will be slow to adopt them."
Gramm: An affection for the 'Net flows from Aggieland.
Phil Gramm senses a kind of regulatory creep: "We have had proposals from other committees to bring computer trading under the FCC," Gramm tells us, referring to the Federal Communications Commission. "That will not happen as long as I live and breathe and serve in the Senate."
Gramm, a Ph.D. in economics from the University of Georgia and a failed candidate for the Republican Presidential nomination in 1996, believes the emergence of the Internet as a major engine of commerce presents an opportunity for Congress to examine the costs and the burden of existing regulation. In the past, he says, regulation was a response to imperfect knowledge about markets, but "the Information Age eliminates many of these potential threats." That's not to say you should throw out all the old rules, he cautions, but they do deserve close examination because "regulations take on almost an eternal life."
One of Gramm's goals as Banking Committee chairman is to examine the effectiveness of the old securities laws and regulations. "I would think that repealing old laws that have gone bad is at least as important as passing new laws," he says. This type of review will be at the heart of the new securities bill, he predicts. He declines to go into specifics because it's up to the subcommittee, chaired by Minnesota Republican Rod Grams, to craft the measure.
Phil Gramm relates how three years ago he and Democratic Sen. Chris Dodd of Connecticut "did a bill together where we sat down with all of the people in the securities industry and said, 'What are the little things that drive you nuts? Of all these hundreds of laws and provisions and amendments and addendum and regulations, what is making your jobs harder?' And we put together a bill -- the National Securities Market Improvement Act of 1996 -- that changed a bunch of little things and in the process brought about a more rational system, which benefited investors. Now we're asking everybody ranging from administrators of the government employees' savings plan to the college and high school teachers' retirement funds to investment clubs to big and small securities firms to the investment adviser in Waxahachie, Texas, what other things can we do to make it easy for people to save and invest." The resulting bill won't have a dominant issue, like online trading, but "literally hundreds of little issues."
One thing is certain: The bill won't call for merging the Commodities Futures Trading Commission and the Securities and Exchange Commission. Gramm's wife, Wendy, who also sports a doctorate in economics, chaired the CFTC in the Bush Administration. The SEC has been lobbying for a merger for years, arguing that the trading of futures and derivatives regulation should be part of its bailiwick. "If we had brought CFTC under the SEC," Phil Gramm argues, "the whole futures and derivatives industry would never have grown as it has because the vested interests the SEC ultimately represents were threatened by the development of these investment products."
Gramm's affection for the Internet stems from his love affair with the Texas A&M football team. Gramm taught economics at Texas A&M before running for Congress, and he retains a strong interest in the Aggies' recruiting efforts. He has discovered two free Internet Websites that post information, gleaned from newspaper items from around the state, about Aggie recruiting. "I talk to our coaches a lot. I'm sort of an insider. But I'm amazed how much information these people know. I don't read the newspapers anymore."
This Web experience has resulted in some Gramm theorems. Among them: "People who prefer government control fear information. Especially spontaneous information," like much of the information on the Internet. Another: The Internet polices itself, with good information driving out the bad. Because of this, Gramm predicts the Internet will revolutionize the securities markets.
"And obviously, if I had invested in one of the big exchanges, I would be trying to figure out one of two things: How do we stop online trading, or how do we adapt it quickly so we benefit?"
As to which of these courses the traditional exchanges are pursuing, Gramm says it's too early to tell. "But it's one of the areas we will look at."
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