March 09, 2021

Toomey: New Apps, Zero Dollar Trades Helping More Americans Reap Gains From Equities Than Ever Before

Washington, D.C. – U.S. Senate Banking Committee Ranking Member Pat Toomey (R-Pa.) today urged his colleagues in Congress and regulators to avoid imposing unnecessary restrictions and burdens on investors in response to January’s market volatility. In his opening statement during today’s Senate Banking Committee hearing on ‘GameStop, Robinhood, and the State of Retail Investing’, Ranking Member Toomey argued that innovative developments, such as zero-commission trading and user-friendly mobile apps, have contributed to broader investment in the stock market.

Ranking Member Toomey’s opening remarks, as prepared for delivery:

Thank you, Chairman Brown, and welcome to our witnesses.

This January’s volatility in the stock market understandably captured everyone’s attention. We saw extraordinary trading volume in GameStop and other stocks. And we also saw some brokers limit stock purchases during this market volatility.

It’s appropriate to examine these events to understand what happened and whether any response is needed. However, I urge my colleagues and regulators to avoid a knee-jerk reaction to impose unnecessary restrictions and burdens on investors.

We have yet to see any evidence of wrongdoing or that the regulatory regime failed to function as intended. Regulatory agencies are reportedly investigating whether any existing laws and regulations were broken. But Congress and regulators should avoid new laws and regulations that could limit investor access to and choices in the stock market.

One reason to tread cautiously is that new developments have made it a great time to be a retail investor. Today, a person of modest means can invest in the stock market at zero or minimal cost.

Two developments particularly stand out: zero commission trading with no minimum account balance and user-friendly trading technology, such as mobile apps.

Zero-commission trading is the culmination of a decline in investor costs since the SEC abolished fixed commissions in 1975 and forced brokers to compete. In the 1980s and 1990s, it could cost you close to $100 to buy several thousand dollars of shares. In the 2000s, online trading sites offered lower-costs, but even they could charge you $30 per trade.

Competition from market makers allow brokers, under their best execution obligation, to obtain a better price for investors than current market price, even after receiving a payment for order flow. And now commissions are zero.

Similarly, new technologies like app-based trading platforms make it easier to access the market, including through buying fractional shares.

Nearly all major brokers, not just Robinhood, have a mobile-based app to make trades easily accessible and free for individual investors.

And it is not just Robinhood attracting new investors – the Wall Street Journal reported that 2020 was a record year for new individual accounts. For example, Fidelity’s retail accounts increased by 17%. These new developments have contributed to broader investment in the stock market.

According to Federal Reserve, in 1989 less than one-third of U.S. households owned stocks. Three decades later in 2019, a majority did. The most rapid growth occurred among lower- and middle-income households.

And let’s not forget about the millions of others—including police officers, firefighters, teachers, and other workers—indirectly invested through pension funds. This allows everyone to share in the tremendous wealth gains generated by the stock market, which used to be available only to wealthy people and institutional investors. Over the past 30 years, stock market investments grew by nearly 11% on an annualized basis.

Despite these positive developments, some see the state of retail investing in only negative terms.

Rather than celebrating the fact that it’s cheaper and easier for average Americans to invest in the stock market, some claim the market is rigged against retail investors. To my colleagues that say this: I’d like to hear why.

Does the retail investor not receive dividends like institutional investors?

Is the retail investor not entitled to best execution on trades like institutional investors?

When a stock goes up in value, does the value of a retail investor’s shares not go up like an institutional investor’s?

And if the market is rigged, why did some hedge funds lose their shirts shorting GameStop while some retail investors hit a home run buying it? 

I am also incredulous at the idea that it hurts retail investors to have access to investing technologies that are inexpensive, pleasant, and easy to use.

Retail investing need not be an expensive, unpleasant, and difficult experience. Nor should we want it to be.

We want more U.S. households to have the opportunity to benefit from the financial gains that are available through the stock market. Your average American doesn’t need big government coming in to limit her access to and choices in the stock market.

The fact is risk is a fundamental part of investing. All investors—whether they are small retail investors or big hedge funds—can gain or lose money by investing.

But we know that for long-term investors in the U.S. stock market investing is the exact opposite of going to the casino. Over time, equity investors win and win big, whereas the casino is designed to always win.

Investors in GameStop and a few other stocks took a fair amount of risk. But they represent a fraction of retail investors. And investors should understand that there are consequences—whether they gain or lose—from their decisions.

Those who bought GameStop at its high likely lost money. I hope they did not invest money that they could not afford to lose. But it is not the government’s role to be telling them what they can and cannot buy.

Furthermore, huge numbers of long-term, diversified investors were not caught up in the GameStop mania.

In my view, the one action that regulators should pursue is to finish the work it started in 2004 for a faster settlement cycle, including same-day or real-time.

A faster settlement cycle will reduce certain risks for clearing agencies because there will be fewer unsettled trades and a reduced time period of exposure.

A faster settlement cycle will also require less collateral by clearing agencies, which may reduce margin charges and other fees that are passed down to investors.

January’s market turmoil revealed that the process for calculating additional collateral in volatile markets is opaque, subjective, and injects a significant amount of certainty when it cannot be determined in advance.

When the SEC moved to T+2 in 2017, the SEC said it wanted to make settlement even faster. Last month, Ranking Member McHenry from the House and I wrote to the SEC asking that they follow through on this longstanding objective.

Let me close by repeating that I think Congress and regulators should tread cautiously here. We should want to make sure that all parts of American society can participate and share in the gains of the stock market. And we should avoid taking actions that would undermine that goal.

I look forward to today’s testimony.

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