Is The SEC Still Working For Wall Street?

By Simon Johnson

The Securities and Exchange Commission (SEC) under Mary Shapiro is trying to escape a difficult legacy – over the past two decades, the once proud agency was effectively captured by the very Wall Street firms it was supposed to regulate.

The SEC’s case against Goldman Sachs may mark a return to a more effective role; certainly bringing a case against Goldman took some guts.  But it is entirely possible that the Goldman matter is a one off that lacks broader implications.  And in this context the SEC’s handling of concerns about “high frequency trading” (HFT) – following the May 6 “flash crash”, when the stock market essentially shut down or rebooted for 20 minutes – is most disconcerting.  (See yesterday’s speech by Senator Ted Kaufman on this exact issue; short summary.)

Regulatory capture begins when the regulator starts to see the world only through the eyes of the regulated.  Rather than taking on board views that are critical of existing arrangements, tame regulators talk only to proponents of the status quo (or people who want even more deregulation).  This seems to be what is happening with regard to HFT.

HFT is a big deal – perhaps as much as 70 percent of all stock trades are now done by “black box” computer algorithms (i.e., no one really knows how these work), and there are major open questions whether this operates in a way that is fair for small investors.  (Disclosure: in 2000-2001, I was on the SEC’s Advisory Committee on Market Information; I was concerned about closely related issues, although market structure has changed a great deal over the past 10 years.)

The technical, “fact-gathering” activities of bodies like the SEC are of critical importance in both building an overall consensus – do we have a problem, what should we do about it – and also in creating the basis for regulatory action (e.g., the SEC does not even collect the data needed to understand how HFT contributed to the May 6 disaster).  And anyone who has ever put together a relatively complicated discussion of this nature can attest that how you frame the issues is typically decisive, i.e., what is presented as the range of reasonable alternative views?

On Wednesday, the SEC will hold a “market structure roundtable” to discuss “high frequency trading, undisplayed liquidity, and the appropriate metrics for evaluating market structure performance.”  But who exactly will be at this discussion?

The names of panelists for this discussion are not yet public and probably not yet final – but the preliminary list is far too much slanted towards proponents of HFT (6 out of 7 seats at the table; see Senator Kaufman’s speech for details), with hardly any representation of people in the markets (e.g., “buy side” mutual funds) who think HFT is potentially out of control or unfair.  It looks very much like someone is setting up a love fest for HFT – and a boxing match with 6 tough guys against one lonely critic.

To be fair, after coming under heavy pressure from a leading member of the Senate Banking Committee over the past 48 hours, the SEC is backpedaling quickly and indicating that the panel invitations can be broadened.  This is encouraging – perhaps the agency is finally overcoming its tin ear problem.

But nothing other than a balanced panel on June 2 would be acceptable.  At the very least, the SEC needs to increase the panel to 10 people – 5 for and 5 against.  And all the issues need to be on the table – including exactly who benefits from HFT, how much money they make in this fashion, and whether or not long-term investors (and the broader economy) really gain from such arrangements.

The SEC must understand that it has a long way to go to restore its credibility.  Wednesday’s quasi-hearing is an important test and many people will be watching carefully.

55 responses to “Is The SEC Still Working For Wall Street?

  1. You’re way behind the curve on this Simon:

    “The SEC and it’s culture of regulatory capture”

    http://www.deepcapture.com/the-sec-and-its-culture-of-regulatory-capture/

  2. “The money power preys on the nation in times of peace, and conspires against it in times of adversity. It is more despotic than monarchy, more insolent than autocracy, more selfish than bureaucracy. It denounces, as public enemies, all who question its methods or throw light upon its crimes.”
    - Abraham Lincoln

    “If the American people ever allow private banks to control the issue of their money, first by inflation and then by deflation, the banks and corporations that will grow up around them, will deprive the people of their property until their children will wake up homeless on the continent their fathers conquered.”
    - Thomas Jefferson

    “When plunder becomes a way of life for a group of men living together in society, they create for themselves in the course of time, a legal system that authorizes it and a moral code that glorifies it.”
    - Frederic Bastiat – (1801-1850) in Economic Sophisms

    “The world is governed by very different personages from what is imagined by those who are not behind the scenes.”
    - Benjamin Disraeli, first Prime Minister of England

    “It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.”
    - Henry Ford

    “We are on the verge of a global transformation. All we need is the right major crisis and the nations will accept the New World Order.”
    - David Rockefeller

    “The drive of the Rockefellers and their allies is to create a one-world government combining super capitalism and communism under the same tent, all under their control…. Do I mean conspiracy? Yes I do. I am convinced there is such a plot, international in scope, generations old in planning, and incredibly evil in intent.”
    - Congressman Larry P. McDonald, 1976, killed in the Korean Airlines 747 that was shot down by the Soviets

    “Give me control of a nation’s money and I care not who makes its laws.”
    - Mayer Amschel Bauer Rothschild

    “If the people were to ever find out what we have done, we would be chased down the streets and lynched.”
    - George H W Bush

    “Needless to say, the President was correct. Whatever it was he said.”
    - Donald Rumsfeld, February 28, 2003

    “Tell a lie loud enough and long enough and people will believe it.”
    - Adolph Hitler

  3. The Libor Index is also watching the balance sheet of the euro banks to justify future increases–at least that is what the e-mail says. Senator Kaufman has always been ahead of the curve…. he joins a growing list of venerable reporters (Helen Thomas earned another star at yesterday’s meeting regarding the BP oil spill, basically telling President Obama this http://snipurl.com/wvdi0). The Libor Index is also watching the balance sheet of the euro banks to justify future increases

  4. Brian Stewart

    What do you think of the proposed rule issued on Wednesday, trying to address many of the issues the SEC currently has with detecting manipulation and gathering data?

    http://sec.gov/news/press/2010/2010-86.htm

  5. Mr. Johnson wrote:

    “The Securities and Exchange Commission (SEC) under Mary Shapiro is trying to escape a difficult legacy – over the past two decades, the once proud agency was effectively captured by the very Wall Street firms it was supposed to regulate.”

    I wouldn’t hold my breathe.

    Obama SEC Appoints Fox To Guard Chicken Coop: Average American To Get Screwed Like Always

    http://tinyurl.com/34sqmcy

    Goldman exec named first COO of SEC enforcement

    Oct 16, 2009

    “The market watchdog agency said Friday that Adam Storch (29), vice president in Goldman Sachs’ Business Intelligence Group, is assuming the new position of managing executive of the SEC division.

    The move came as the SEC has been revamping its enforcement efforts following the agency’s failure to uncover Bernard Madoff’s massive fraud scheme for nearly two decades despite numerous red flags.”

    http://tinyurl.com/32w2kvu

  6. PeterPeter

    > And in this context the SEC’s handling of concerns
    > about “high frequency trading” (HFT) – following the
    > May 6 “flash crash”, when the stock market essentially
    > shut down or rebooted for 20 minutes – is most
    > disconcerting.

    Many HFT firms continued trading on May 6th – and as the SEC has already shown on page 27 in their 151 page opus (the 29th page in http://www.sec.gov/sec-cftc-prelimreport.pdf), the top 10 trading firms continued to add more liquidity during the critical moments of May 6th then they removed, and in particular added more liquidity than under normal conditions.

    Perhaps Simon and Sen Kaufman were advocating that they blow through their capital controls and add to positions regardless of their leverage ratios???

    Other providers of liquidity (myself included) shutdown on that day, as the anomolous conditions were too dangerous to trade, and technical issues with ARCA caused material problems processing their data feeds in a timely manner.

    The possibility of having trades busted by exchanges (which sadly came to pass) further thwarted other liquidity providers from staying in the markets (and certainly on selective securities for those who continued to broadly trade), as the possibility of having a single leg of a transaction broken could have led to catastrophic market losses (i.e. buying Accenture for $1.00 let alone $0.01, and then selling it for $20.00 would have been a theoretical gain, but in practice an enormous loss as the purchase transaction would have been cancelled leaving to a net short position established with a price of $20.00).

    The events of May 6th, as the SEC is finding (and which anyone who stops to think about the issue would clearly understand), were caused by market orders and stop loss orders.

    No sophisticated firm (HFT or otherwise) sells shares of Accenture for 1 penny. Those types of market moves can only be caused by market orders, which are typically issued by retail and unsophisticated institutional participants.

    Against a tsunami of market orders, there is no amount of liquidity that can be mandated from either computers of humans which will withstand the onslaught and clean wipe of 1 side of the consolidated order book.

    Perhaps Senator Kaufman does understand this and is grandstanding (it is of course good politics), but even if he didn’t, I would think any economists who thought about market participants, their financial incentives, their margin requirements and their risk controls would.

    It may be fun to blame the machines for May 6th, and it certainly was caused by machines – but those machines were under the control of retail traders and ludite institutional traders, who didn’t understand the effects of a wave of market orders.

  7. Any self-respecting software engineer has a pretty good idea how HFT programs work at a high level. Some serious trending analysis will then reveal the biases that exist at the detail level. Given that Wall Street is becoming a big casino, the trick is to tip the odds slightly in your favor. If one can supply a trigger, or set of triggers, that causes reactions by the HFTs then there is big money to be made. To actually do this is quite complex, however, there is enough money involved to provide serious incentive.

  8. SEC To Boost Market Oversight After Flash Crash

    Wed, May 26 2010

    (Reuters) – “Securities regulators proposed improving market surveillance on Wednesday by tracking stock orders across all U.S. equity markets in real time. The measure, under development at the U.S. Securities and Exchange Commission for months, would likely have helped the agency piece together the brief May 6 crash in stock prices.

    “It is shocking that the SEC does not have its own direct access to market data,” SEC Commissioner Luis Aguilar said at a public agency meeting. “Most Americans assume that the SEC already has these tools and is constantly monitoring the market.”

    Hindered by their inability to easily see the entire marketplace, the SEC and other regulators are still analyzing the market swoon that saw the Dow Jones industrial average plunge some 700 points in minutes before recovering.

    SEC Chairman Mary Schapiro said analyzing the events of May 6 has been substantially more challenging and time consuming because no standardized, automated system exists to collect data across the various trading venues, products and market participants.”

    For nearly three weeks, regulators have been analyzing more than 19 billion shares of stock that were traded on May 6. They still have been unable to pinpoint the cause of the free fall.”

    http://www.reuters.com/article/idUSTRE64P3VV20100526

    Blame it on Skynet :-)

  9. Simon,

    Keep up the good work.

    Here’s a bit of definitional trivia.

    You say “HFT is a big deal – perhaps as much as 70 percent of all stock trades are now done by “black box” computer algorithms (i.e., no one really knows how these work), …”

    It is probably more accurate to say that no OUTSIDERS know how these “black boxes” work. Insiders, the people who designed the algorithms, know exactly what is in these “black boxes” – and these designers may also think they know how the algorithms work.

    But, it’s very likely, given recent experiences like the flash crash, that these insiders really don’t know EVERYTHING that should be known about how their inventions work. And, since the insiders don’t share their designs with others, no one else can help with catching gotchas in the code.

    From Wikipedia (and confirmed by my own engineering background):

    “In science and engineering, a black box is a device, system or object which can (and sometimes can only) be viewed solely in terms of its input, output and transfer characteristics without any knowledge of its internal workings. Almost anything might be referred to as a black box: a transistor, an algorithm, or the human mind.

    The opposite of a black box is a system where the inner components or logic are available for inspection (such as a free software/open source program), which is sometimes known as a white box, a glass box, or a clear box.”

  10. Brett in Manhattan

    The SEC was never a proud agency. Its first head was a ruthless stock manipulator named Joseph Kennedy.

    This case came about because the pressure on the SEC was so great they finally had to do something. Look for the Fabulous guy to get thrown under the bus. Then, it’s back to business as usual.

  11. Thank you.

  12. Love it, LarryP.

  13. To answer Johnson’s title question–”Is the SEC Still Working For Wall St.?”–one need only take seriously Johnson’s description of “regulatory capture,” namely, “Regulatory capture begins when the regulator starts to see the world only through the eyes of the regulated. Rather than taking on board views that are critical of existing arrangements, tame regulators talk only to proponents of the status quo (or people who want even more deregulation).” By “status quo” Johnson obviously means only the status quo of the regulatory apparatus; but if the term is defined economically, say, as “corporate capitalism, modern oligopolistic in form,” then it is obvious that the SEC is a proponent of the status quo. And if the term is construed only as “corporate capitalism,” then Johnson himself is revealed as a proponent of the status quo–the “free market system” that he labors to “reform,” hence “save.” –The “concerns” about HFT that the SEC confab will voice will be of a piece with the “concerns” that the Better Business Bureau voices about a ‘few bad apples’ in order to maintain the credibility of business in general.(The Goldman case will follow a similar trajectory, if history is our guide.) Of course, if the SEC follows Johnson’s suggestion and includes more critics of HFT among its interlocutors, it will indeed gain the “credibility” that Johnson seeks–but this will in the upshot advance the “credibility” of the oligopolistic economic status quo among the gullible, an outcome that Johnson the reformer purports to oppose. Ergo, Prof. Johnson should be careful of what he wishes for . . . .

  14. Kliment Voroshilov

    Regulatory capture, regulatory smapture! Watch how fast a regulator comes to share the views of those he regulates when that party contributes to the campaign coffers of the political amoeba that sponsored the regulator in the first place. Making this whole proceedure sound as though it were moral in someway is vintage Johnson, perhaps, but vintage naive as well. I’d been hopeful reading Johnson fuss and fume through the “financial reform” charade here recently, he almost gave the impression he could get angry at times. But with this piece it looks as though he’s fallen back on old tricks. Hint: In Washington convictions are a commodity, Simon. Go lead a general strike.

  15. There really is no end to all the different ways we can scr-w each other over – and each new bit of technology just offers yet another creative scr-w…

    WHY was “money” created as a SYMBOLIC FORM OF CURRENCY…?

    Like it or not, we are heading back to marching all the heads of cattle past the bank to be counted.

    Too much “virtual” now for it to be real…OR SUSTAINABLE.

  16. Ms Shapiro/SEC/Fairness?????

    Disgusting, hubris, depressing. Three words to describe an agency that once defended the citizens, and is now the ‘whipping boy’ of wall street.

    As the disclosures continue (like the recent announcement of the stacked panel for June 2) we become more repulsed.

    This is a contribution to robbing our society of its greatest asset. OPPORTUNITY. SEC open disdain for fairness would be laughable if it were not so pathetically Machiavellian.

    Disgusting!
    Gene Sperling

  17. This is a very astitute observation John.

    My view of your comments are actually that the end results of what we are currently witnessing. The absence of INTEGRITY, lack of ethics, political manipulation and GREED. They’re all merging.

    The Pentagon and the Current Wars
    The Oil Companies and Unprecedented Pollution
    Wall Street and Unbridled Corruption
    The Banks and Political Dominance
    Politicians and Hubris Deceit

    They all seem to be coming together to build one gigantic explosion. It’s like watching a train wreck in slow motion.

    Is this our Hope? The alternatives and the time are growing shorter.

  18. trouserman

    That dear departed socialist, John Kenneth Galbraith, said many things well. Here’s something he wrote about regulation:

    “Regulatory bodies, like the people who comprise them…mellow, and in old age…they become, with some exceptions, either an arm of the industry they are regulating or senile.”

  19. trouserman

    A fine list of quotations, Rene. I hope you don’t mind me adding one:

    “The process by which banks create money is so simple that the mind is repelled.”
    —John Kenneth Galbraith

  20. @Annie: Of course an economic system based on continual growth cannot be sustainable.

    Take a look at steadystate.org for another approach. The Center for the Advancement of the Steady State Economy is preparing an alternative for when the global financial system collapses.

    Pass it on.

  21. Gene wrote:

    “…It’s like watching a train wreck in slow motion. Is this our Hope? The alternatives and the time are growing shorter.”

    Our task is to ferry wounded souls across the River of Dread till they see the dim light of hope, at which point we stop, push them into the water and tell them to swim.

  22. This post touches on a subject , that for me, is the most important for the phoney market. That is HFT. Simon even admits know one knows how the software works. At the least, are these proprietary programs front running each firm’s own legitimate business? Are the proprietary softwares tied in with each other so that positions get conceded between the firms by silent agreement when they present an anomaly?

    When computer software IS the market…. a human market does not exist. Certainly, market theory antedating the computer must be totally obsolete.

  23. Bruce E. Woych

    so we are to accept this premise that incompetance was at the bottom of a machine driven misunderstanding? We are to accept this from a person who is ascerting that “many” of the HFT firms were still pumping when the big dump short circuited?

    So we are to accept your judgement that Senator Kaufamn is grandstanding in the limelight of challenging the power brokered status quo?

    With razzle dazzle certainty you tell us not to believe our experiences because only the market experts who milk this system daily who know how to finesse this system really know what is best for the market.

    I think you might be correct about stop losses being part of the trigger mechanism in this strategy of firestorm acquistions, but maybe you need to stop and think about what is possible and probable when aggressive greed is engineered by computer technology and the computer technology goes to the most cold blooded and aggressive vultures.

    HFTs have no saintly purpose on this market earth and it is an arrogant self service to state that anyone who does not see your reduction as truth simply dosen’t understand reality. Kaufman is not grandstanding…that is a pathetic accusation considering the courage it takes to stand alone and fight the financial interests back from the brink of self destruction. Alas; unlike the experienced traders who know it all, … Kaufman only has history on his side. I will trust his integrity over others in this political jousting arena.

    The “Flash Crash” is an sufficient market term. Maybe you didn’t know that? It means that the preponderance of the market think that your HFT strategies are too big to gamble (TBTG).

    Also: the tricky business of setting up a false negative premise to sanctify an alternative is both a formal/propositional and syllogistic fallacy based upon an exclusionary premise. CON ARTISTS USE IT!

    KEEP UP THE GREAT WORK SIMON, YOU KNOW YOUR DOING SOMEHTING RIGHT WHEN THE KINGFISH START JUMPING.

  24. Brett in Manhattan

    I remember another good quote that goes something like this:

    The problem with regulatory bodies is that the benefits of cooperation outweigh those of conflict.

  25. Clipped from Washington’s Blog

    Max Keiser – journalist, former Wall Street broker and options trader, and inventor of the software which is now being used for high frequency trading – claims that the big banks retroactively allocate losing trades to their clients, and keep the winning trades for their own proprietary trading desks …

    This is the second time in the couple of weeks that Keiser has made this allegation. When he first brought this up, Keiser said that he has first-hand knowledge of this unlawful activity because – when he was a trader – he and everyone else did the same thing.

  26. Brad Thrasher

    The SEC is more of a networking agency for lawyers who didn’t get hired by Omelveny & Myers straight out of law school.

    On Wednesday President Obama attended a fundraiser for Barbara Boxer hosted by Ann & Gordon Getty, heirs to the J. Paul Getty fortune. On Thursday, after shaking down oil executives, Obama gave his Gulf Oil Spill press conference.

    If the boss does it, we shouldn’t be surprised that the minions are doing it.

  27. Dan Palanza

    We must understand that money is not created by banks. It is created by the book-keeping system that the banks, among others, use to create the money. Bad book-keeping creates the bad money that you correctly call “virtual.” Fix the book-keeping and you will fix the money system. Then money will return to representing “real value.”

  28. ne Wenglin

    The NYTimes (May 28) reports: “Goldman Sachs is looking to avoid a charge of fraud from the Securities and Exchange Commission by coming to a settlement over a lesser offense, The Financial Times reported.”

    A settlement on a criminal fraud charge must be construed as bribery. And as such it would only serve to further re-enforce the gaming of the macro-financial structure as epitomized by Goldman Sach’s implacable self-serving attitude. There are two components to a civil society: equitable governance, and oversight with enforcement: laws, and policing with repercussion (prison). As long as the Wall Street Mob continues business as usual the social structure will corrode. Punishing Goldman Sachs does little; it is a business, not a person. Punishing or curtailing GS’s top management, and their board, changes behavior.

  29. The SEC has always swallowed the myth that white shoe Wall Street is legitimate and fraud is confined to penny stock boiler rooms. It has completely ignored white shoe organized crime, which has long involved the fleecing of clueless fund managers attempting to survive by chasing yield on toxic fixed income products.

  30. SEC’s capture may date back twenty years, but be fair. Levitt and Donaldson were earnest regulators and enforcers. The hip-pocket appointees of Bush: big accountings’ Harvey Pitt, and Ayn Randian, kisses for corporations Chris Cox derailed the SEC intentionally. No doubt you’ve read GAO’s May 6, 2009 report: SECURITIES AND EXCHANGE COMMISSION-Greater Attention Needed to Enhance Communication and Utilization of Resources in the Division of Enforcement. But for those who haven’t:

    http://www.securitiesdocket.com/wp-content/uploads/2009/05/gaoreportsec.pdf

    Would like SJ’s and JK’s observation: Any perceived connection between the ubiquitous presence of Rand acolytes in the Wall Street-Washington daisy chain and recent acceleration of financial crises and disruptions?

  31. “The events of May 6th, as the SEC is finding (and which anyone who stops to think about the issue would clearly understand), were caused by market orders and stop loss orders.”
    ===================================

    You obviously have no idea what you’re talking about.

    The SEC has issued a 100 page report on the events of May 6th and it doesn’t contain any explanation for what happened.

    That’s because they know exactly what happened. But they don’t want us to know. It had nothing to do with “retail traders and ludite institutional traders”.

  32. Thanks, Carla, I’ll check it out from this perspective – having a “formula” implies that there is agreement on what the “sustainable” man to land ratio IS at a certain level of “luxury”…

    And for even a weirder perspective – did I miss the memo announcing that all the processes involved in huddling together atoms into the final product – flowers – have been discovered and are programmed into the software?

    After all, flowers showed up only recently when looking at the billion year time continuum that it took to BUILD, maintain and program Spaceship Earth

    :-)

  33. Let’s make things simple for all.

    Without HFT desks, this market will have virtually NO volume, thus creating wider spreads which will, in turn, lay down the groundwork for different forms of manipulation.

    So HFT programs are what keep this market(can’t think of a better word) alive. They can be likened to a life support system! I am sure that some of these bloggers know that there are software programs out there with cool names like ‘seek and destroy” or ” stealth assasin”. And we just saw a small glimpse of what these programs can do. I am almost certain that some of this software had their algos retweaked since May 6th but thats just about that will transpire from the flash crash.

  34. Economics are easy to understand, but many complicate it… Free-market competition is the driving force for giving us the best products and the most prosperity for all… how do you think America rose from nothing only 234 years ago to become the wealthiest country on Earth in such a short time?

    Btw, a money saving tip I’ve found if you have print needs… I have yet to find print prices this low!… BrumPrint.com.

  35. Alan wrote:

    “Economics are easy to understand, but many complicate it… ”

    “I would gladly repay you Tuesday for a hamburger today. ”

    J. Wellington Wimpy

  36. An interesting conjecture zack.

  37. This being the case, the so called market is a grifter’s concoction? If the spreads are more volatile in a real market and these phoney trades aid in a smoother more orderly market, do we not still have a grift . Is this the Efficient Market Hypothesis demonstrated in the real world? Then , should HFT only be permitted to the state so that all other market participant’s are on a ” equal” footing. Of course, HFT really begs the question under such circumstances that those permitted to use HFT are really the state anyway?

  38. I think 95% this is going on and it’s rampant. And although I always listen to Keiser with the left eye squinted and the right eyebrow cocked, I think Keiser is dead on accurate on this issue. I also think it’s interesting we never hear the boys at Zerohedge blog discuss this, we never see any investigative reporting from Bloomberg on this. Now we have FINRA (The Financial Industry Regulatory Authority) policing/supervising trades on the NYSE.

    Are the boys at Zerohedge blog upset that FINRA is policing trades on the NYSE now??? I wouldn’t hold my breath waiting for the commentary on that. Zerohedge only gets angry when “market-makers” steal from other “market-makers”, not when the individual investor gets F_cked.

    http://www.businessweek.com/news/2010-05-04/finra-to-take-over-surveillance-of-nyse-euronext-u-s-exchanges.html

    So this is self-regulation, the financial industry watching the financial industry. How many years do you think it will be before the SEC or others start poking around and see the lies FINRA and the “market-makers” are up to there??? Or will they just go the usual route and wait until it explodes in everyone’s face. I guess as long as only the small individual investor is getting screwed it doesn’t matter eh??? Just imagine each time you trade the “market-makers” take a quarter point or 10 cents on each side of the bid/ask trade. So it’s like you’re being charged commission twice and the invisible commission of course is more than the “9.95″ they ask you for one each trade. Or worse if you’re the dimwit who needs a full-service or premium broker.

    Enjoy

  39. Re: @ tippygolden____Excellent point,”retroactively allocate losing trades to their clients, and keeping winning trades for their proprietary trading desk”….? As mentioned by others – repealling of the “Uptick Rule”, and no audits of trades lost in a black box are intriqing avenues too follow-up by the Securities, and Exchange Commission (SEC),and the Internal Revenue Service (IRS) respectively. Stop-Losses are useless as we all experienced during the hellish wake-up call regarding the Asian Crises. The markets need to bring back the “Collar/5%/10% Rule”, period. Ironically, the only ones that lost big on May 6, 2010 “HFT’s”, were the ETF’s which trade automatically when certain criteria are met. I’d like to mention a site referencing, “Wash Sale Rules,and Audit” – http:www.irs.gov/taxtopics/tc429.html

  40. Sandi Rubinspan

    Kudos to Ted Kaufman for pointing out the “inconsistencies” in our “Financial Markets”.

    The arguments for big finance are complex. The arguments against not so much. It does not take an Ivy League criminal to see the problem: The financial markets cannot possibly be “free and fair”.

    HFT is a criminal endeavor on it’s face. If HFT were not extremely short term profitable, they wouldn’t be doing it. They are pumping and dumping the pension and investments of the long term investors and skimmimg the cream. Totally undesireable for us peons, okay for the elite.

    The Flash Crash is not a joke, nor is regulatory capture. The US has a real problem with domestic criminal economic terrorist organization which are, by far, a much more significant threat than Bin Laden.

  41. The SEC IS Still Working For Wall Street

  42. Love it. The comments are now better than the posts.

  43. Might this explain how the TBTFs made profits on their trading desks 61 days in a row?

  44. PeterPeter

    > It had nothing to do with “retail traders and
    > ludite institutional traders”.

    Right… because the most sophisticated market participants who you revile so much were the ones selling ETFs below fair value and selling their shares of Accenture for 1 penny!!! Get real.

    The stupidest trades which led to the drop were obviously placed by the stupidest market participants, or those brokers who liquidated accounts due to margin calls (which given the speed of the downturn was probably a very small contributing factor).

    Stupid prices needs stupid trades (market orders, stop loss triggered market orders or grossly mis-priced limit orders). Stupid trades needs stupid participants. The HFT firms are quite the opposite of stupid.

    This was a repeat of 1987 and 1962.

  45. Sandi Rubinspan wrote:

    “The US has a real problem with domestic criminal economic terrorist organization which are, by far, a much more significant threat than Bin Laden.”

    When you consider the amount widespread economic pain and suffering, it’s hard to disagree.

  46. Theoretically, the book-keeping was completed before the actual head counting of cattle in order to fund empire extension, no?

    What once had “real value” is empty and at the mercy of disintegration by natural forces

    because all funding for life-maintenance (AKA as “jobs”) has been shangheid to the war chest – can we please stop kidding ourselves?

    The real “misery” that will continue for the victims of the massive transfer of “wealth” – those dead broke who were picked off first because they played by the rules –

    will continue to come from the Judicial branch of the government (“regulatory capture”).

    Precedent becomes “common law” and subsequent rulings” rely on precedent. When you know you are going to break every “common law”, you already have an “ordinace” written up to protect you…

    The inmates ARE in charge of the “institution”…

    Well, at least we are, finally,free of psychobabble and religiosity…WAR is the suspension of law and we are at war.

  47. Of course the SEC works for Wall Street. Government and Wall Street are synonymous with one another. Dodd is a corporate shill, just like Obama, but as fancy.

  48. Providing liquidity is a good thing & should be encouraged. But no one *needs* millisecond or better liquidity.

    It will never happen, but I’d like to see more call auctions rather than ATS’ skimming customer flow and providing rebates to “liquidity providers” who are really just front-running…

  49. Ah, Byrne is just a whiner. He has absolutely nothing useful here (or ever, really) – he’s just obsessed about naked short selling.

    There is no good evidence that “those damned shortsellers” are actually causing damage. Much more money is extracted on the pump’n’dump side. Most hedge funds play fair, some don’t. Looking to HFs is a distraction from the issues with real money involved. Most of the damage comes from the banks trying to rip their customers’ lungs out.

  50. NYSE “worked” just fine – all the bad prints in three letter stocks came on alternative trading systems. It was a failure of market mechanisms plus the failure of the (algos?) traders who ended up issuing stupid trades under the misplaced assumption that there was just as much protection at BATS as at NYSE.

  51. Actually, there are some HFT algos that are running, that no one really understands. I am serious. I know of several, where they run, and who is trying to control them. “Control” tends to be more analog – watching risk indicators and dialing things in. It’s kind of scary. However, one firm that has some of these in place made money every single day in Q1. I can’t reveal who it is because it would be deeply embarrassing to the CEO, Mr. BLANK____

  52. It may be the case that HFTs don’t cause “much” harm. I think (based on analyzing tens of thousands of trades) that HFTs have added perhaps 3bps of cost to the typical trade – maybe 1 cent on average. But this has come along with a fair amount of additional liquidity of sorts and is existing in a world of steadily eroding commissions. I suspect the typical retail investor is not harmed very much, but millions of investors are paying a few cents to the HF guys. Institutional trades are probably screwed over quite a bit more – they get front-run and probably are paying 10bps (this number is guesswork, the 3bps above is accurate for retail-style flow)

  53. “The US has a real problem with domestic criminal economic terrorist organization which are, by far, a much more significant threat than Bin Laden.”