Regulation, Digital assets & AI

[00:00:00] Running the only publicly traded market, Virtu. So I appreciate you taking some time with us today. Thank you. It was very much looking forward to our conversation, Rob. Nice to meet you. Likewise. And we're going to cover a lot of ground here. So I think. We'll start off some of the SCC and recognizing that you have an open legal matter with them.

So the limitations of what you can really say there, we'll start there. We'll talk about the market making, what the business entails, and some of the perceptions or misperceptions around that. We'll talk about, of course, the SCC and where, you think the SCC, or I think the SCC. Perhaps autofocus and then shift gears and talk about your entrepreneurial and leadership journey.

And I know, Doug, you can speak at length about any of these topics for a full hour, so I'm gonna do my best to keep pace here. I think what started this conversation is there was a, an article that Charlie Gasparino published in the New York Post, and Gary Gensler [00:01:00] is making the SEC into a public and then he, the article goes on, and essentially, The allegation is that Chair Gensler may be targeting Virtu because you're a public and outspoken critic of Chair Gensler.

Is that an accurate summary? How would you look at that? Yeah, I don't want to speak for Charlie and I don't want to summarize his article. I read the article. It was a good piece. I liked the little graphics part that the New York Post does. I got a lot of favorable and nice comments from the Friends and people I didn't even know, people contacted my wife and said, keep up the good fight.

So I do think that there is an undercurrent, a groundswell of people recognizing what I would call like governmental overreach. And I think this really goes back to like a basic fundamental philosophical difference that Chair Gensler and I have [00:02:00] about, and other people have. It's obviously not exclusive.

About the role of government in our lives more broadly, and in this case, the role of a principal financial regulator in the world of finance and investing. If you go back and look at what is the mandate of the SEC? It's really fundamentally like fair and orderly markets, investor protection, right?

Those are the main two prongs. And when Gensler came in and. April of 21. As I understand it, he assured a lot of the folks on the Senate side that were somewhat trepidatious about him, some because of his background at Goldman, some because of his history at the CFC, and frankly some because he was the chief financial officer of Hillary Clinton's campaign and actually wrote the check for the Perkins Coie investigation, which became the Steele dossier, right?

So he's a guy that has a known political bias, and people were concerned that he was going to apply that in his capacity as, the principal financial regulator of [00:03:00] markets. He assured people he's a markets guy. And what we have seen is exactly the opposite. So there was a great article, I'm sure you saw, Ram, in the Wall Street Journal that Professor Hal Scott of Harvard did about all of the SEC proposals and comparing them to the prior chair, the prior administrations, if you will, both Republican and Democrat.

And the vast preponderance of the proposals that Gensler has put in place are either not supported by legislation, or frankly, and or, frankly, ignoring the procedure under the Administrative Procedures Act as to how rules should work. Should be adopted. And so Professor Scott's thesis was, a lot of these are going to end up being overturned and yeah, I've spoken out very passionately on some of the market structure proposals because I think they just represent a fundamental, one, misunderstanding of the markets, and two, a real bias against how markets should work.

That is informed by the Chair's [00:04:00] political philosophy, which is very paternalistic. It's like the nanny state, if you will, of markets. I think a lot of the animus towards Robinhood and self directed trading and the analytics behind their algos and confetti and all that kind of stuff that Gensler talked about is really because I don't think his view of government and his view of how the government should control markets is very different than An app where people can self direct trading, his perfect world, we would all be in like mutual funds and there wouldn't be active trading.

I really do believe that. And so philosophically, he's got a very different view of how these things should work. And I think that has informed their bias. And that has then percolated down to SEC enforcement and how they have viewed firms like mine and other firms, frankly, that they have.

Attacked. In this specific instance, which as you mentioned, is now an act of litigation, there is a statute, right? [00:05:00] Our view, I used to be a practicing lawyer, as you can probably tell, our view is that we didn't violate the statute, but even assuming for a second that we did, there are penalties

In the same way that if we breached a contract in a civil matter there would be contractual penalties for breaching a contract, right? So the government doesn't just get the pull out of thin air, but amounts and numbers and say you owe us this as a fine. That's my fund that was really my fundamental reaction when we started engaging with them because they offered to settle this thing.

So we could have written a check and settled it, but for an amount that just was not supported by what the statute provided. And you're not God, right? The government has rules. They're all laws. They're subject to the rule of law. They're subject to the rule of law. So if you think that we have violated it, we're going to disagree with that, right?

We don't think we did anything wrong. We're seeing that across the space. In digital assets, [00:06:00] where over the last four years has been really two and a half, I would say there's been this regulation by enforcement. Yeah. And you know what I find remarkable and, former SEC Chair Arthur Levitt and I wrote an op ed in the Wall Street Journal in October.

Yeah, I remember. And we said, look, we haven't had interpretive guidance updated in four years, and in the last four years we've seen the rise of NFTs staking and defi. And the chair is maintaining this view that is, that there's clarity. And then the courts are a time and time again. Now, four times in a row are saying, no, there's not.

Yeah, we're repudiating the chair. So I think, and to your earlier point, if you think back to the history of the founding of the American Republic, it was to escape a king that's now subject to the rule of law, that was the rule of a man. And we want to create clear rules for the road that encourage the integrity of capital markets, capital formation, and investor protection, which is a sound mandate.

I think to your point, look, people can have different points of views on the value, [00:07:00] whether you're paternalistic or not. But exceeding the mandate of the SEC is an issue, and then second, if you're picking political fights because you don't like what someone is saying that isn't in public, that's a concern.

Because not many people have the resources to stand up and face off with the SEC. That's a difficult position. Yeah, look, and I don't relish it, right? It is not a Something I don't come in the morning and say, geez, I really want to get into litigation with my principal regulator. That, that sucks. It's as a formal lawyer, it's not what you want to do. Obviously, we've got the resources to fight it. We're using my old law firm, the head of SEC enforcement, blah, blah, blah. We've got great lawyers. And we're, and my view is we're going to prevail and we're going to win this thing, but we're going to take a PR hit.

And obviously, it probably impacts the stock price. So it sucks. I don't really want to be involved in it. Your point on digital assets, is even a better example, okay, and I don't pretend to be an expert around the Howey test, obviously I used to be a lawyer, I understand it, I've read the article.

In Bitcoin [00:08:00] futures, we'll come back to the Bitcoin ETF. Yeah, we'll come back to that, but fundamentally it is, I'll use a strong word, it is really disingenuous for the chair of the SEC to stand up and say, just come on in and register. It's just it's, you can't, a Form S 1 doesn't really work for an ICO.

A Form S 1 doesn't work for Ethereum. It's just, it just doesn't exist, and he knows that. He knows that. He's a very smart guy. He taught Digital whatever at MIT so he's extremely well versed in it, and I know that the House Financial Services Committee and Senator XYZ are working on a on a a bipartisan digital assets bill, so we do need clarity, because these things don't perfectly fit in.

And ultimately, his main concern is one, Elizabeth Warren doesn't really like digital assets, so therefore now he doesn't, right? He goes with the political tides. And two, it's a turf fight, right? He knows the CFTC SEC turf fight very well, which is why House Financial Services and the House Ag Committee have gotten [00:09:00] together.

Frankly, I think the CFTC is a very, is a, has done a much better job and the chair there has provided some clarity. But to your point, like then going after what was the NFT he went after last week? Like crazy cats or drug cats or cool cats or something like that? Some NFT I'd never heard of before in my life.

And they paid a million dollar fine and gave back eight million dollars of they didn't have the resources to fight the SEC. So they were completely bullied into a settlement, I'm sure. I don't know any of the facts. I'm speculating. Where did Gensler make the left turn? You worked with him, I believe when he was the head of the CFTC.

Yeah, I know Gary for years. I worked with him at the CFTC, and he was difficult to deal with there. He's a very smart, opinionated man, but, and we all had high hopes, right? He, when he taught MIT blockchain, I said, all right, great. We have someone that can connect the divide between the old world, and the new world.

And the new world is all to all and decentralized. We have lower trust requirements on your counterparties and you have more transparency, more liquidity, more efficient execution, which [00:10:00] advances The interest of the retail investor. So where do things make a left turn? I think in the Odd Lots podcast, you even referred to Gary as brilliant, and he has the high intellectual caliber.

And is it political? Is it the fact that Warren perhaps is his political sponsor? And these things happen, when you need to get Warren to be, your backer in the primary. Is that where this comes from? I know we're speculating now, but I'm curious what your perspective is. Yeah, those are the obvious signals.

I know him from I worked at Paul Weiss, which was a very Big D, Democratic connected law firm, right? I am, and I'm a registered Democrat myself, right? So I know his people. Hillary Clinton used to spend days walking through Paul Weiss raising money. I gave Hillary Clinton money.

I know Gensler, I know Chuck Schumer, I know these cats. I knew him. I know a lot of people that knew him at Goldman and whatnot and et cetera, so he's not unknown to me and to a lot of people around Virtu. My partner Vinny Viola was working with [00:11:00] Gensler back in the 80s and the 90s when he was at Goldman, right?

So we know him quite well. Obviously, He got into the world of Washington politics, worked in Treasury was Clinton's campaign manager in the failed 2016, not campaign, treasurer, excuse me, the 2016 election, and then wanted to get back into politics, spent four years at MIT, and I presume what ended up happening was, Warren, who controls, 8, 9, 10 progressive votes on the Senate side, presumably, said, Listen, I'm not going to support Goldman Gary unless you do the following things.

I'm speculating, but I think part of it's maybe political ambition. There's been allegations that he wants to be Treasury Secretary. And you know how it is, if you're a New York District Attorney

Rom, you froze. I don't know if you can hear me.

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