Securities and Exchange Commission Chairman Gary Gensler told lawmakers Thursday that his agency is focused on any fraud that may occur when investors communicate in social media, and not on collusion.

In testimony before the House Financial Services Committee about volatile trading in GameStop Corp. and other shares in January, Gensler on Thursday resisted the suggestion from Rep. Bill Posey, R-Fla., that retail investors coordinating online could pose a threat to markets. 

“We should always be vigorously enforcing our laws and ensuring that there’s not fraud and manipulation, but again, we all have a free speech right to go and say to a neighbor, whether it’s online or in person, I like this investment,” Gensler said, noting that the agency has jurisdiction over fraud and not free speech.

“Our laws are about if somebody’s trying to defraud another person, mislead another person, manipulate the markets,” he added. “That we should root out and vigorously root that out, whether that’s a big institution or an individual, or frankly, a computer controlled by a big institution.”

In the committee’s third hearing on the GameStop volatility, Gensler faced questions from both Democrats and Republicans about the role social media played. GameStop’s price soared from about $20 a share to more than $400 in January when retail investors organizing on online forums such as Reddit’s r/WallStreetBets bought up shares in the store. The price now hovers around $160 a share.

The SEC and its regulations should be technology neutral, “but recognize that technologies in each generation provide us new ways to communicate,” he said. 

“We’ve got to lean in at the SEC and learn how to basically be a cop on the beat, so that free speech goes on,” he said. “But if somebody is trying to manipulate a market or spoof a market or put fraudulent information into a social media channel, that we protect investors against that.”

Democratic Reps. David Scott of Georgia and Emanuel Cleaver II of Missouri said they were alarmed by the investors’ reliance on information from social media during GameStop. 

“There is now such a huge hole in our regulatory process because of GameStop, with inexperienced investors relying on unverified information from unqualified social media,” Scott said. “When erroneous and inaccurate information posted on social media sites has the ability to broadly influence investors and move the market, sometimes drastically, this, gentlemen, poses a serious question for you, our regulators.”

Cleaver said he was worried about the threat social media poses to democracy.

“I am really afraid of some bad stuff happening,” Cleaver said. “I’m hoping that on a night when you are about to get a peaceful night’s rest, that you will remember the questions raised by Congressman Cleaver.”

‘Intersection of finance and technology’

Gensler also updated the panel on the actions the SEC has taken or plans to take in response to the GameStop incident, including a report scheduled to be released this summer. His testimony represented his most extensive public remarks on the trading volatility to date. He assumed control of the agency last month. 

The SEC is examining the gamification of investing through investment apps; conflicts of interest in the relationships between brokers and intermediaries that execute customer trades; a shorter settlement cycle for trades; and more transparency in short selling, he said. Gamification refers to elements common to game-playing being used in investment apps.

“These events are part of a larger story about the intersection of finance and technology, which have lived in a symbiotic relationship since antiquity,” Gensler said. “Technology can mean greater access to our capital markets. Our central question is this, though: When new technologies come along and change the face of finance as they have done for decades, how do we continue to achieve our core public policy goals?”

Many retail investors buying up the GameStop and other stocks used online, commission-free investment apps, such as one operated by Robinhood Markets Inc. Robinhood paused purchases of stocks on Jan. 28 to meet margin requirements for the clearinghouses settling the trades. 

Gensler said SEC staff is also preparing a request for public comment on the behavioral prompts used within investment apps that encourage more frequent trading.

“Many of these features in essence encourage investors to trade more frequently. This could have a substantial effect on a saver’s financial position,” he said. “Some academic studies suggest that the more actively you trade, the lower your returns.” 

The agency is also reviewing whether commission-free brokers, such as Robinhood, that rely on payments from intermediaries called market makers in exchange for routing customer orders violate investor protections, Gensler said. 

Robinhood paid $65 million in December to settle SEC charges that its business model’s reliance on payment-for-order-flow violated a rule that requires brokers to execute trades in the manner most favorable to its customers.

“Payment for flow, which some brokers use and some don’t, is in essence a payment to the broker for that order flow and it can be in conflict with the interest of that customer,” Gensler said, adding that he’s instructed staff to review the practice.

He said the event also prompted the agency to take a look at transparency around short selling. The practice allows investors to capitalize on a predicted drop in stock price by borrowing shares, selling them, buying them back when the price drops, returning them to their owners and pocketing the difference.

Retail investors detected that hedge funds had heavily targeted GameStop shares for short selling and sought to outmaneuver them by buying up shares and boosting the price. Hedge funds that had borrowed shares were still on the hook to return them at a loss. 

Gensler said SEC staff is also drafting a proposed rule to shorten the time between when a customer places a trade and when the transaction is settled. The process takes two days following the placement of the transaction.

Robinhood CEO Vlad Tenev blamed the length of settlement and collateral tied up to support it for the app’s suspension of GameStop purchases in January.