[MUSIC PLAYING]
ANNOUNCER: Welcome to TD Cowen Insights, a space that brings leading thinkers together to share insights and ideas shaping the world around us. Join us as we converse with the top minds who are influencing our global sectors.
[MUSIC PLAYING]
JARET SEIBERG: Welcome to Two Cents, the financials podcast at TD Cowen. I am Jaret Seiberg, Managing Director and financial services policy analyst at TD Cowen Washington Research Group. We start our September podcast with Scott Smith, TD Cowen's specialty salesperson for financials, who will provide an update on the market. Then we shift to TD Cowen market structure guru Reid Noch to delve into the world of tokenized stock trading.
But first, let's catch up on the news out of Washington for financials. The biggest story is the fight for control of the Federal Reserve and the 12 Federal Reserve banks. President Trump has tried to fire Lisa Cook as a Federal Reserve Governor. That's now being litigated.
In the meantime, the Senate is rushing to confirm Stephen Myron for an open slot on the Federal Reserve Board. We believe Team Trump's goal is to have a majority on the board before the Fed votes in January on the regional Reserve Bank presidents, as that would let it influence those selections and further cement its control over monetary policy.
The other big developments are on the bank deregulatory front. The Fed released lower capital requirements for the big banks, as expected, with the 2026 stress capital buffers. Regulators also have sunset their novel activities program, which is positive for banks that want to get into crypto. And we're still waiting for broader capital reforms that will cement some of these changes into place.
All right, with that quick catch-up of the news, let's turn to our first guest. Scott Smith is TD Cowen's specialty salesperson for financials. No one has a better handle on how the broader financials team is thinking about the sector than Scott. So, Scott, what are you hearing and thinking?
SCOTT SMITH: Hey, Jaret, it's certainly been an interesting time over the last couple of weeks. Most of what we've been seeing is an awful lot of strength in the bank stocks, unsurprisingly. That really started with second quarter earnings calls where commercial industrial loan growth came in a little bit better than people were expecting.
But the real driver here, of course, was the Fed opening the door at Jackson Hole to rate cuts and the expectation that would keep the US economic growth going. That was the biggest catalyst to making regional banks, in particular, the best performing subsector in the entire market in the month of August.
JARET SEIBERG: Thank you, Scott. Always informative. My second guest is Reid Noch, who is our US market structure expert. I want to get Reid on because SEC Chair Paul Atkins is intending to open the National Market Structure Rule in order to accommodate tokenized stock trading. Reid, what is Chair Atkins up to? And how could this help and impact the equity trading market?
REID NOCH: Actually, this morning, the SEC just released their reg flex agenda on what's on Atkins' docket. And sure enough, there's a lot of vague crypto rules, where the devil will be in the details. This comes as Chair Atkins' latest remarks are on Project Crypto, where he says the SEC is actively considering exemptive relief in the coming months for tokenized securities.
As you talked about before, it takes years for the SEC to establish a new rule. And said rule could be held up in court for years longer. But the SEC can always waive rules away with a stroke of a pen. And so we see this roundtable, and people have discussions with the SEC ahead of this roundtable that's happening in a few weeks as a lead-up into the SEC having exemptive relief for tokenized securities.
JARET SEIBERG: Let me stop you there for a second. Let's make this a little bit more basic. What is tokenized equity trading?
REID NOCH: So a lot of different models it can take shape of, but it's essentially taking stocks and putting them on the blockchain. Whether it's an ADR model, where you take actual stocks, and vault them somewhere, and you issue a token that is a whole other security, or you have companies issue stocks directly to the blockchain itself.
JARET SEIBERG: And why would anybody want to tokenize securities?
REID NOCH: Original largest selling point was for 24 hour trading and fractionalization of shares. Both of those have been adopted now into traditional market structure. The biggest now appeal to tokenized securities appeals to be the amount of rules that are waived to do so, with Robinhood's CEO actually stating that he wants to sell thousands of private companies shares directly to retail through tokenization. And so his idea and other people's idea is that once you tokenize a stock, suddenly, all the rules and regulations the US have just go right out the window.
JARET SEIBERG: And why does anyone think that this is a good idea?
REID NOCH: There's definitely a lot of money to be made in that area, getting around the rules, especially for certain private companies or for higher trading volumes. There has been frustration in the US, for some time, around a lot of these rules.
But really, this is more being marketed straight to retail and having more access directly to them, whether intermediaries such as Coinbase, Robinhood, who get more control of that relationship, or firms being able to sell directly to retail. But for the most part, traditional institutions are not asking for this.
JARET SEIBERG: OK, so you brought up a roundtable that the SEC is going to hold in a couple of weeks. Tell us about that roundtable and why it matters.
REID NOCH: So the roundtable will address the Order Protection Rule, which really sets the NBBO in the US.
JARET SEIBERG: Wait, let me stop you. So we had a little acronym in there. What is the NBBO?
REID NOCH: National Best Bid and Offer.
JARET SEIBERG: Why does that matter?
REID NOCH: It matters because if you're going to trade a stock, you have to get up to the shares being displayed. You have to execute at that price or better of what you're seeing on the screen.
JARET SEIBERG: So we're going to have a roundtable. They're going to talk about this rule. What are we expecting out of this roundtable?
REID NOCH: I had fears that it was going to be much more crypto focused. And talking to people who have been in discussions with the SEC, it will be discussed, but it's more so going against whether OPR should be amended or eliminated in the US, as Chair Atkins has been against the rule since its inception almost 20 years ago.
JARET SEIBERG: All right, and so let's say they get rid of that rule, or they provide exemptive relief to exempt companies from the rule. What's it going to mean for stock trading?
REID NOCH: Essentially, it allows, then, stock trading to trade at any prices that can happen. There's no sort of force mandate to go to or exchanges at all. And so prices can just be executed at any level outside of the markets. And so it really opens up blockchain trading, which in Coinbase's white paper, claims that the Order Protection Rule is one of the main hurdles of tokenized stocks taking shape.
JARET SEIBERG: All right, and from the perspective of the different players in the trading space, we have exchanges, we have broker-dealers, we have discount brokers, what's the impact on all these different players?
REID NOCH: Honestly, if they get rid of this rule, there's almost no reason I can imagine to be an exchange besides limited liability. Besides that, though, exchanges have been really restricted on how much innovation they can release or what they can do because participants have to go there.
And so when that opens up, you could see any venue could start streaming quotes. That execution is going to be much more fluid on brokers' decisions. Depending on, then it opens up tokenized shares, liquidity can just fragment. And a lot of the traditional players could be flat footed.
JARET SEIBERG: All right, so Reid, last question for you. This seems like it could be fairly momentous. It doesn't seem to be getting a lot of attention. Is it really close to happening? Or are we going to have time to adjust to it?
REID NOCH: I would say it's pretty close to happening. Again, for a new rule to come into play can take a long time. And so an actual more rigid rule amending or getting rid of OPR could be years away. But in terms of exemptive relief, we could have that easily by the end of this year, next year, in some form or another.
JARET SEIBERG: Well, it seems like we're going to have to have you back in a couple of months to update us on where this stands, given its potential significant impact on the market. Reid, thank you for your time today.
REID NOCH: Thank you.
JARET SEIBERG: All right, let's wrap this up with our September preview. For monetary policy, it's the FOMC meeting on September 17 and 18, with expectations for our first rate cut since President Trump was inaugurated.
For Congress, it's the National Defense Authorization Act, as that will be the vehicle that moves other legislation. We're looking for provisions related to credit card interchange and to expanded deposit insurance for businesses. And we have the risk of a government shutdown on September 30, which represents both an economic risk and it could harm the mortgage market, as it means the flood insurance program also will shut down.
All right, well, that will give us a lot to look back on when we record our October podcast. Until then, thanks, everybody for joining us.
ANNOUNCER: Thanks for joining us. Stay tuned for the next episode of TD Cowen Insights.
[MUSIC PLAYING]
